The Reserve Bank of India has allowed resident Indians to open foreign currency accounts in Gift City (IFSC near Gandhinagar, Gujarat) for purposes permitted in the Liberalised Remittance Scheme (LRS). Earlier, these accounts were limited to investing in securities in Gift City and education-related payments. This broader scope for remittances can be a game-changer for Indians. Here’s how.
Uses of a Gift City account
If you are a frequent traveller to foreign countries, buying forex in India can be expensive and cumbersome. Banks and other forex dealers charge huge spreads (can go to 5-10% for small amounts). It also means filling out a form each time and providing details such as passport number.
If you are able to hold the forex in a USD account in Gift City with an attached debit card, you can just transfer a bulk amount in one go. The amount will earn interest, and you can simply spend it whenever you go abroad. The fact that the US dollar historically appreciates against the Indian rupee is a bonus point.
If you are a student or a parent, you can park the money in the Gift City account and remit it whenever needed for university or hostel fees and living expenses. This would also save you forex conversion charges (you are generally offered a better rate on a bulk amount).
Similar benefits apply if you support relatives outside India or gift money to them. If you also invest outside India, the account can be used to stagger your investments (do a SIP in a stock or fund abroad).
Another use case is for employees of foreign MNCs who have Esops (employee stock ownership plan) or RSUs (restricted stock units) of the parent company situated outside India. They can remit the sale proceeds of such sock options to these foreign currency accounts. “Sale proceeds of ESOPs or RSUs can be transferred in, but if the money is not used to invest further, it has to be remitted back to India within 180 days. The FEMA guidelines apply here and the sale proceeds can’t be left in the account for over six months,” said Jaiman Patel, tax partner, EY India.
A number of Indian banks such as ICICI Bank and Kotak Mahindra Bank have launched operations in Gift City, while various funds have also launched alternative investment funds like the one run by Aditya Birla Sun Life AMC.
Benefits
You can park your money with well-known Indian banks such as ICICI Bank, Axis Bank, Indusind Bank or HDFC Bank which are regulated by RBI in India and by IFSCA (International Financial Services Center Authority) in Gift City.
Meeting the bank staff based in Gift City (near Gandhinagar) will be easier compared to opening accounts in Singapore or London. The interest rates in Gift City are also slightly higher than mainstream banks in the US or Europe. For NRIs, there is no tax on the interest on such accounts. For resident Indians, however, such interest is fully taxable.
Roadblocks
RBI rules require that unused funds must be remitted back to India within six months. This can create complications if your payments are staggered over multiple years. For example, if you have to pay course fees for the next two years or you want to set aside travel money for the next 12-18 months.
“Resident Indians remitting money for a specific purpose must use it accordingly. For example, if you remit money for tourism, you must either utilize it within six months or remit it back. This rule doesn’t apply once the purpose is fulfilled. For instance, if you remit money for investment and invest in foreign stocks, any subsequent earnings, such as dividends or proceeds from selling stocks, can be reinvested or saved for future investments,” said Lalit Jadhav, partner, Financial Services, BDO India.
Points to note
The money you remit will be subject to tax collected at source (TCS). This is 20% for amounts above ₹7 lakh in most cases. You also have to disclose the account balance and any investments you make in Schedule FA of your Income Tax Return every year. Also note, you cannot use the money for purposes prohibited by RBI such as forex trading or derivatives trading.
Conclusion
RBI’s latest decision opens up many possibilities for Indians when it comes to investing, travelling or studying abroad. However, be mindful of the strict tax rules surrounding disclosures of such assets as well as the foreign exchange rules. You cannot use funds remitted under LRS for derivatives or forex trading.
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