Key facts
- Wealthy Indian residents are using the Liberalised Remittance Scheme (LRS) to send funds to NRI relatives as 'gifts'.
Wealthy Indian residents are reportedly using the Liberalised Remittance Scheme (LRS) to send funds to NRI relatives as 'gifts' to indirectly invest in lucrative Foreign Currency Non-Resident (FCNR) deposit schemes. This strategy aims to capitalize on high, tax-free dollar returns, a move reminiscent of similar schemes in 1998 and 2013.
This practice highlights a potential loophole in financial regulations that allows residents to access high-return, safe dollar instruments indirectly, potentially leading to significant capital inflows and a cost to the government for subsidizing these returns.
Wealthy Indian residents are reportedly finding ways to benefit from the Reserve Bank of India's (RBI) new Foreign Currency Non-Resident (FCNR) deposit scheme, which offers high fixed-income dollar returns. Sources indicate that residents are using the Liberalised Remittance Scheme (LRS) to transfer funds to trusted Non-Resident Indian (NRI) relatives as 'gifts'. These funds are then indirectly parked in the FCNR scheme, allowing residents to access lucrative, potentially tax-free dollar assets, especially if the NRI relative is in a tax-free jurisdiction like the UAE.
This strategy mirrors past instances, notably in 1998 and 2013, where residents sought to capitalize on similar schemes. NRIs are also reportedly breaking existing FCNR and NRE deposits, even foregoing accrued interest, to move their money into these new, more attractive FCNR accounts. The FCNR scheme is viewed as a safe product with high leverage potential, often over nine times, which can significantly boost returns.
Experts like Pankaj Bhuta, a senior CA and FEMA specialist, note that these transactions are technically permissible under the Foreign Exchange Management Act (FEMA). NRIs are allowed to remit up to $1 million annually from their NRO accounts, which facilitates the transfer of funds into the new FCNR scheme. Rajesh Shah, a partner at Jayantilal Thakkar & Co, highlights that residents are drawn by the high leverage and returns, while NRIs benefit from tax-free earnings on their dollar assets.
The scheme is expected to attract more money into India than is remitted out under LRS due to the leverage involved. Family arrangements will dictate whether the funds are returned to residents after the deposit term or kept overseas. Neither the initial 'gift' nor a potential 'reverse gift' is taxed. The RBI's move to lower the LRS limit in 2013 had previously curtailed such activities. Ultimately, the cost of the enhanced returns offered to NRIs is borne by the Indian exchequer, as the RBI absorbs hedging costs.