MUMBAI: Banks have begun questioning the ‘source’ of money that individuals are moving abroad, particularly to acquire properties overseas.
Sometimes they are scanning past income statements to figure out the origin of the fund while a few banks recently enquired whether the money that would be transferred out of the country was a ‘gift’ from a relative.
Under the Liberalised Remittance Scheme (LRS), resident individuals are permitted to transfer up to $250,000 a year abroad to invest in properties and securities, maintenance of relatives, among other specified purposes. Some of the tax professionals and bankers ET spoke to said authorised dealer (AD) banks are undertaking greater scrutiny before clearing LRS remittances.
“Many residents have used the LRS to remit funds since 2004. Similarly, non-resident Indians have remitted money under the regulation allowing them to transfer a million dollars a year from India. However, of late, many AD banks are holding back remittances, citing internal instructions which are not in the public domain or part of any regulation or master direction. It would be helpful if there’s greater regulatory clarity on what is allowed and what is not,” said Rajesh P Shah, partner at Jayantilal Thakkar and Company, a chartered accountancy firm specialising in tax and matters related to the Foreign Exchange Management Act (FEMA).Total remittances under LRS rose from $12.68 billion in 2020-21 to $27.14 billion in 2022-23, after dipping to $19.61 billion in 2020-21. According to available figures released by the Reserve Bank of India (RBI) which regulates the scheme, remittances crossed $27.4 billion for the April-January period of 2023-24.
At least two private banks (one large AD, another mid-sized) have recently questioned clients about the fund source, said sources. Banks, probably sensing the current regulatory milieu, feel that some are using the LRS window for purposes it was not originally meant for.
“The original interpretation of the liberalised remittance scheme was to ensure that any funds remitted for capital or current account transactions belong to the remitter (personal savings, education loan, salary, business income, as mentioned in form A2). Based on the RBI guidelines, the AD bank has the power to verify and even question the source of funds (more particularly for property or capital transactions) and request for supporting documentation like bank statements, tax returns, etc.,” said Priyanshi Chokshi of Adarsha Advisors which offers tax and international accounting services.
However, there are multiple scenarios where individuals remit funds as follows: a cash gift provided by a father to a son is further remitted, use of borrowed funds, use of funds obtained through financing from an individual’s own company, said Chokshi. “The AD banks are now scrutinising such transactions in more detail, in line with the intention of RBI to ensure that a remitter uses funds ‘belonging to him’ and does not remit the funds for illegal or laundering purposes,” she said.
However, such remittances of ‘gift’ are primarily a mechanism to pool adequate funds by a family to purchase properties abroad. On certain occasions, such investments are a precursor to migrating to countries with programmes offering citizenship against investments.
“Asking for source details is not a mandate under the LRS norms. Such enquiries are more driven by the internal policies of the bank or in connection with any account-specific matters. It serves as a check as to whether the limits set up under the LRS are not exceeded directly or indirectly,” said Yashesh Ashar, partner at Illume Advisory engaged in services like accounting, taxation, and corporate finance. For instance, a person, who has already exhausted his annual LRS limit, may ask a relative to send the money on his behalf.
