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FEMA and US tax

Liberalized Remittance Scheme

RBI introduced the scheme vide AP DIR Series in 2004 as a step for liberalization to promote residents to remit funds internationally.

  • Assets held during migration from India
  • The amount earned on these assets in India
  • Assets or funds that have been gained from overseas remittances for investment and other purposes.

However, the Government of India has liberalized remittances of assets and income.

 

Qualifications

Almost any resident individual can take advantage of the scheme. LRS is, however, not for corporates, HUF, partnership firms, and Trusts

Current Limit

RIs can remit free up to $2,50,000/- every year for capital and current account transactions. The limit is set for every RI. Every family member can enjoy this facility. So, a 4-member family remits up to $10,00,000 in a year. If the foreign exchange is above USD 2,50,000/-, it needs remittance and prior approval of RBI. But, in some transactions, remittance can go beyond this amount, and Authorized Dealer Bank allows it, and there is no need for prior approval.

Permissible Transactions

Resident Individual will easily be able to access the foreign exchange facility for various purposes. You have to check out them before making any transaction

Current Account transactions

  • Open, hold, and maintain foreign currency accounts
  • Buy property in a foreign country
  • Invest in securities, shares, and mutual funds in a different country
  • Start Joint Ventures abroad for bonafide businesses
  • Extend loans, such as loans in INR to NRI who is a close relative. Current Account Transactions
  • Medical treatment abroad
  • Visits to a county (such as Bhutan and Nepal)
  • Emigration
  • Pursue a course outside India
  • Buying pieces of art

Restrictions and prohibitions under LRS

  • Under this scheme, a remittance facility cannot be availed for some purposes
  • Remittance or a prohibited activity, such as, lottery
  • Capital account remittance indirectly or directly to countries recognized by the FATF
  • RIs should not gift other RIs for a foreign currency account
  • Family member remittance for transactions of capital accounts
  • Remittance for foreign exchange trading abroad.

LRS limit and exceptions

The facility is available to RI when it is intended for medical treatment, studies, and emigration.

Compliances and processes

  • A Resident Indian should designate an AD Bank branch through which the remittances have to be made under LRS.
  • RI must maintain his or her bank account with any AD Bank for a certain timeframe.
  • PAN is needed to do remittance under LRS
  • Form A2 is to be submitted by RI to AD Bank

Other general rules

  • There is no limitation on the remittance frequency under the scheme. But, the amount remitted during the particular Financial Year must be from the funds of the remitter. It means that the fund should not be borrowed.
  • Indian and foreign citizens are Indian residents for employment. They can also make remittances up to the salary after deducting taxes.
  • RI who likes to remit funds under the scheme can stay outside the country. But, those who have made direct investments overseas in a WOS should report the investment to RBI. They should also be compliant with other terms and conditions.

Borrowing and lending activities by NRI

An NRI is allowed to get a loan from Indian banks, and he or she is subjected to different terms. Banks will also be able to give loans to NRIs on different securities and shares. NRIs can also obtain an overdraft or loan against NRO in India. But, this loan cannot be used for relending and carrying on plantation and agricultural activities. Resident Individuals have the right to lend money at the limit of around $2,50,000 every financial year. The loan must not charge interest and involve at least a 1-year maturity period. 

Borrowing money from RI

The RI should borrow up to an amount of USD 2,50,000/- under some conditions

  • The minimum loan period is 1 year.
  • There should be no interest in the loan.
  • Inward remittance would receive the loan amount in foreign exchange through banking channels.

Borrowing by RI

A person residing in India can borrow an amount based on non-repatriation due to some reasons.

  • Inward remittance will receive the loan from a different county.
  • The loan period must not go beyond 3 years.
  • Interest and loan repayment must be credited to the NRO of the lender.
  • The borrowed amount must not be repatriated outside India.

The US tax laws

These laws vary with citizenship and residency. The USA has imposed a tax on both citizens and residents on their income regardless of where they reside. A US person means he 

  • Is a US citizen
  • Holds Green Card
  • Meets Substantial Presence Test

Jobs Act and Tax Cuts

US Congress sanctioned tax reforms on 22nd December, 2017. The legislative reform is known as the Tax Cuts and Jobs Act. The main areas that have an impact are federal tax slab rates, Estate tax lifetime, and standard deduction. 

Taxability in the USA

US citizens have to file the Federal tax return regardless of their location. They are also responsible for local and state taxes. The Tax Cuts has amended the federal tax slab rates.