Outward remittances fell 16% in May due to increase in TCS: RBI bulletin

Outward remittances under the Reserve Bank of India’s (RBI’s) Liberalised Remittance Scheme (LRS) declined by over 16 per cent in May 2024 from the year-ago period due to the base effect.

The LRS scheme was introduced in 2004, allowing all resident individuals to remit up to $250,000 per financial year for any permissible current or capital account transaction, or a combination of both, free of charge. In the initial phase, the scheme was introduced with a limit of $25,000, which was revised gradually.

According to the latest RBI bulletin, remittances under the scheme stood at $2.42 billion in May 2024, 16.18 per cent lower than the year-ago period.

During the Union Budget for FY23, the government proposed to raise tax collection at source (TCS) to 20 per cent from 5 per cent on amounts exceeding ~7 lakh for all purposes, except for education and medical treatment. The revision was scheduled to be effective from July 1, 2023.

The proposal during the Budget led to a 41 per cent year-on-year (Y-o-Y) increase in remittances under the scheme in May 2023 from the year-ago period to $2.88 billion. However, the Ministry of Finance later deferred it to October 1, 2023.

During the reported month, remittances under the largest component - international travel - slipped marginally to $1.40 billion compared to $1.49 billion in the year-ago period.

Remittances from maintenance of close relatives dropped by 34.63 per cent to $320.8 million from $490.7 million in May 2023. The ‘gifts’ segment witnessed a 30.4 percent slump to $271.9 million.

Similarly, remittances for overseas education dropped by 14.7 per cent Y-o-Y to $210.9 million while the ‘deposit’ segment saw a nearly 47 per cent decline to $52.98 million from the year-ago period.

Indian remittances under the LRS scheme for medical treatment, and the purchase of immovable property rose by 47.59 per cent and 2.21 per cent, respectively to $7.66 million and $21.69 million.

RBI buys $4.22 bn foreign currency

The RBI purchased a net total of $4.22 billion worth of foreign currency in May, according to its monthly bulletin. The central bank bought $23.64 billion, while it sold $19.42 billion of foreign currency in May. The RBI had recorded a net sale of $3.64 billion in the spot market in April. Its net outstanding forward sales by May stood at $10.36 billion.  The headline foreign exchange reserves, excluding the forward book, stood at $651 billion as of the end of May.