RBI Rules on Foreign Stock Investing

Legal Framework: FEMA & LRS

Foreign Exchange Management Act (FEMA)

FEMA, 1999 is the primary legislation governing foreign exchange transactions in India.

Authority: Reserve Bank of India (RBI) administers FEMA and issues guidelines

Liberalized Remittance Scheme (LRS)

Introduced in 2004, LRS allows resident Indians to freely remit money abroad for permitted purposes.

Current Limits (2026):

• Annual cap: $250,000 per financial year (April-March)
• Per person: Individual limit (not per family)
• Cumulative: Includes ALL foreign remittances (investments + education + travel + gifts)

What's Allowed Under LRS

Permitted Investments:

• Equity shares listed on recognized stock exchanges (NYSE, NASDAQ, LSE, etc.)
• ETFs (Exchange Traded Funds)
• Mutual funds registered in foreign countries
• Bonds & debentures of foreign corporates
• Real estate (subject to host country laws)
• Fractional shares via intermediary platforms

Other Permitted Uses of LRS:

• Foreign education (tuition + living expenses)
• Medical treatment abroad
• Travel expenses
• Gifts to relatives/friends
• Maintenance of close relatives abroad
• Emigration expenses

Key Requirements for Stock Investments:

• Must be through authorized dealer banks (all major Indian banks)
• Purpose code: S0001 (Investment in equity/debt securities)
• A2 form declaration mandatory
• PAN card linking compulsory
• All transactions must be routed through regular banking channels (no cash, no hawala)

What's Prohibited Under LRS

RBI explicitly bans LRS remittances for certain purposes:

Strictly Prohibited:

• Lottery tickets, banned magazines, soccer/sweepstakes
• Gambling & betting activities
• Foreign currency coins (except for numismatic purposes)
• Trading in Transferable Development Rights (TDRs)
• Investment in companies engaged in real estate business (exceptions apply)
• Margin trading in foreign markets
• Prohibited activities under Schedule I of Foreign Exchange Management (Current Account Transactions) Rules, 2000

Grey Areas (Consult Experts):

• Cryptocurrency: Not explicitly banned under LRS but discouraged by RBI
• P2P lending platforms: Case-by-case basis
• Unlisted foreign startups: Generally not permitted under LRS (requires RBI prior approval)

Compliance & Documentation

A2 Form Declaration

Every LRS transaction requires filing Form A2—a self-declaration submitted to your bank.

Key Details in A2 Form:

• Purpose of remittance (investment code: S0001)
• Amount in INR and USD
• Beneficiary details (broker/custodian account abroad)
• Your PAN, address, passport number
• Declaration that remittance doesn't violate FEMA

Process:

1. Your broker (Vested/INDmoney) auto-generates A2 form
2. You review and e-sign via platform
3. Broker submits to bank on your behalf
4. Bank processes remittance within 1-2 days

Annual Information Statement (AIS)

Income Tax Dept's AIS tracks your LRS remittances automatically.

Check AIS annually to verify reported amounts match your records.

Record-Keeping Requirements:

Maintain for 7 years:

• A2 form copies
• Broker account statements
• Bank remittance confirmations
• Purchase/sale confirmations
• Dividend/interest statements

Special Cases & Clarifications

NRIs (Non-Resident Indians)

NRIs do NOT need LRS—they can invest in foreign stocks directly from NRE/NRO accounts.

However, NRIs must comply with host country regulations + Indian tax reporting.

Minors

Minors CAN remit under LRS with parent/guardian as custodian.

Limit: $250,000 per minor (separate from parent's limit)

HUFs (Hindu Undivided Families)

HUFs are NOT eligible for LRS. Only resident individuals qualify.

Companies & Trusts

Not covered under LRS. Require separate RBI approval for overseas investments (ODI route).

Joint Accounts

Each account holder gets individual $250K limit.

Example: Husband + wife joint account = $500K combined annual limit

Common Compliance Mistakes

Mistake #1: Exceeding $250K Limit

Sending $260K in one year—even by mistake—violates FEMA.

Solution: Track cumulative remittances via AIS + bank statements monthly.

Mistake #2: Using LRS for Prohibited Purposes

Routing money via Singapore entity to invest in unlisted startups—clear violation.

Mistake #3: Not Filing ITR After Foreign Investment

Forgetting Schedule FA = non-compliance + ₹10L penalty risk.

Mistake #4: Hawala/Informal Channels

Some investors use informal money changers for better FX rates—illegal under FEMA.

Penalty: Entire transaction amount can be confiscated + criminal prosecution.

Mistake #5: Not Declaring Source of Funds

Banks may ask for source documents if remitting large amounts (₹10L+).

Be ready with: salary slips, business income proof, sale of assets proof.

How RBI Monitors LRS Compliance

Automated Systems:

• SWIFT tracking: All cross-border payments monitored
• A2 form database: Banks report all LRS transactions to RBI
• FATCA/CRS: USA/other countries share financial data with India automatically
• AIS integration: Income Tax dept tracks foreign assets

Red Flags That Trigger Scrutiny:

• Multiple small remittances just under ₹7L threshold (TCS avoidance)
• Remittances to shell companies/tax havens
• Round-tripping (sending money abroad, bringing back disguised)
• Mismatch between ITR income and foreign investments