Forex

RBI's New Foreign Remittance Rules to Boost Trade - 2025

Union Budget 2023 was the last approved budget regulating foreign remittances, and while some of its provisions were welcomed, it received criticism for increasing the TCS (Tax Collected at Source) from 5% to 20% for many transactions. This created liquidity challenges for many businesses, especially ones relying on international transactions.

The new foreign remittance rules released by the RBI are aimed at reducing the TCS and making it easier for Indian exporters to open foreign currency accounts overseas. These new foreign remittance rules are expected to impact businesses in many ways and this article discusses what businesses can expect in the days ahead. Here is an overview of the major changes:

RBI has made significant changes to the FEMA regulations to facilitate cross-border transactions in INR and other local currencies. This is in line with the efforts to promote the use of the rupee globally in the backdrop of strengthening dollar, weakening the Chinese yuan, and fluctuating crude oil prices.

New Changes to FEMA Guidelines:

Non-Resident Accounts:

Overseas branches of Authorised Dealer (AD) banks can now open INR accounts for non-residents. These accounts can be used for current and capital account transactions with residents in India.

Use of Repatriable INR Balances:

Balances in repatriable INR accounts like Special Non-resident Rupee Accounts (SNRAs) and Special Rupee Vostro Accounts (SRVAs) can be used by non residents to:

  • Settle transactions with other non residents.
  • Make foreign investments including Foreign Direct Investments (FDIs) in non debt instruments.

Bilateral Agreements:

RBI has signed Memorandums of Understanding (MoUs) with central banks of UAE, Indonesia and Maldives to promote cross border transactions in local currencies.

Foreign Currency Accounts for Exporters:

Indian exporters can now open foreign currency accounts overseas. These accounts can be used for:

  • Settlement of trade transactions.
  • Receipt of export proceeds.
  • Payment for imports using export proceeds.

Revised Payment Regulations:

As of December 2023, Foreign Exchange Management (Manner of Receipt and Payment) Regulations have been revised. This revision allows cross-border transactions in INR and all foreign currencies.

This will reduce dependence on dominant foreign currencies like the US dollar, diversify the trade settlement methods, and strengthen the rupee in global markets. By giving more flexibility to exporters and allowing non-residents to use INR balances for investments, RBI is building a more robust and wider framework for international trade and finance.

RBI’s New Foreign Remittance Rules Make It Easier to Invest in International Stocks

Profit from investing in stocks invites the long-term capital gains tax (LTCG) held at 20% for foreign stocks and 12.5% for domestic investments. This made foreign stock investments an unattractive option, not only because of the higher tax rate but also because of the fact that foreign transactions generally involve currency exchange fees and higher brokerage rates. The rationale for the higher tax rate was to encourage domestic investments, however, this is expected to change with Budget 2025.

Tax Changes for international stocks

Aspect 2023 Budget 2025 Budget
LTCG 20% 12.5%
Holding Period 24 Months 24 Months

The equalization of Long-Term Capital Gains (LTCG) tax rates for both domestic and foreign stock investments has made foreign equities a more attractive option for Indian investors. While the full economic impact of this new foreign remittance policy remains to be seen, it has generally been welcomed by the Indian investing community, which now has greater flexibility in diversifying their portfolios.

Current & Expected Tax Rates for Outward Remittances

The tax rates on foreign remittances are governed by the Liberalised Remittance Scheme (LRS), launched by the RBI in 2004, which has since been regularly updated.

Currently in 2025, the TCS for foreign remittances is set at 20% for transactions exceeding 7 Lakhs INR. This applies mainly to business and travel-related payments, while medical and educational expenses are covered under different tax schemes under the LRS. The 20% TCS rate is considered too high and its implementation was delayed until Oct 2023 due to practical challenges. It is expected that Budget 2025 will reduce the TCS back to its previous rate of 5%. This is mainly because a 20% TCS adversely affects the liquidity available for businesses, as a substantial sum is locked in under taxes.

TCS on foreign remittances under the LRS scheme (only above 7 Lakhs)

Type of Remittance Current Rate Expected Rate
Overseas tour package 20% 5%
Investment abroad 20% 5%
Purchase of immovable property 20% 5%
Other remittances (gifts, donations, employment, maintenance, etc.) 20% 5%

Source: https://economictimes.indiatimes.com/wealth/personal-finance-news/budget-2024-higher-tcs-of-20-on-certain-foreign-remittances-via-lsr-can-be-reduced-to-5/articleshow/111682496.cms

A lower TCS rate allows the government to effectively monitor and regulate high-value foreign exchange transactions while maintaining robust tax compliance measures. This adjustment strikes a balance between providing liquidity relief for taxpayers and ensuring regulatory oversight in relevant financial matters.

Relaxed Rules on Reporting Foreign Assets

Under the current scheme, non-reporting of foreign assets valued at more than Rs. 5 Lakh, invites a penalty of Rs, 10 Lakh. This is seen as counter-intuitive, as the penalty amount is more than the tax amount.

The new budget rules aim to ease this regulation by allowing the non-reporting of assets up to Rs. 20 Lakhs, meaning no penalty as long as the monetary value of foreign assets does not exceed 20 Lakhs. This makes tax compliance easier for businesses and individuals holding small foreign assets like ESOPS or social security/pension accounts.

Impact of New Foreign Remittance Rules Impact on Different Sectors

Small and Medium Enterprises (SMEs)

The possible reduction of TCS rates from 20% to 5% in Budget 2025 will significantly ease liquidity constraints for SMEs involved in international trade. By lowering the tax burden, businesses can free up capital for critical operations, such as inventory purchases and technological investments, improving cash flow and operational flexibility.

The relaxed remittance rules also make it easier for SMEs to explore global markets. Lower TCS rates and simplified compliance help SMEs to source materials, establish global partnerships, and increase exports

‍IT and Tech Companies

For IT firms and tech startups that frequently engage in overseas contracts and projects, the lower TCS rate translates into more efficient capital management. Previously, the high TCS rates often tied up significant portions of their working capital, impacting cash flow and hindering their ability to invest in new technologies or scale operations. With the reduced rate, these companies can now retain more of their funds, allowing for greater flexibility in managing operational costs and pursuing growth opportunities.

Manufacturing and Export-Driven Industries

The Manufacturing sector often relies heavily on international transactions for sourcing raw materials and purchasing equipment. This leads to a substantial amount of outward remittances. The new proposed TCS rates will help them retain the majority of their working capital, which was tied up in taxes under the previous regime. With the new lower rate, businesses in the manufacturing and export sectors can access more of their funds, improving cash flow and operational efficiency.

Final Thoughts

Overall, the new foreign remittance rules are seen as a step in the right direction. Indian investors are happy with the reduced LTCG tax rates, while small foreign asset holders are pleased with the higher thresholds for asset reporting. The LRS which governs outward remittances from India is also expected to revert to older and lower TCS rates, which will free up capital that businesses can use for other investments and business ventures, boosting overall economic activity.

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