A Bengaluru founder wires USD 60,000 from her savings to seed a Delaware C-corp for a new AI product. Her bank clears it in a day. Eight months later, two things arrive together: a 20% tax collected at source that she never budgeted for, and an email from the bank asking for the Unique Identification Number of the foreign company. She has none. She has just made an overseas investment under LRS without filing Form FC, and the missing Annual Performance Report is now a FEMA contravention that can be penalised at up to three times the amount she sent. The transfer felt like a bank transfer. It was three separate compliance regimes firing on one remittance.
- Who must comply: Any resident individual (founder, promoter, angel) sending money abroad to buy shares in or fund a foreign company.
- The three regimes: RBI’s LRS (USD 250,000 a year, Form A2), FEMA Overseas Investment Rules 2022 (Form FC + UIN + APR), and Section 206C(1G) of the Income-tax Act (20% TCS).
- The cost: 20% TCS on the amount above Rs 10 lakh, plus a FEMA penalty of up to 3x the sum involved if reporting is missed.
- The recurring deadline: Annual Performance Report by 31 December every year, for each foreign entity.
- Act now: File Form FC before you remit, keep the money within the USD 250,000 cap, and diarise the APR.
The problem: a wire transfer that is really an overseas investment under LRS
Most founders learn the inbound side of FEMA early. They know FC-GPR when a foreign investor buys their shares, and FLA when they report foreign holdings. The outbound side is where the gaps sit. The moment a resident individual sends money abroad to subscribe to or buy equity in a foreign company, three rulebooks apply at the same time, and each one is administered by a different authority.
The first is the Liberalised Remittance Scheme, run by the Reserve Bank of India under its Master Direction on LRS. It lets a resident individual remit up to USD 250,000 per financial year “for any permitted current or capital account transaction”, in the words of the Master Direction, without prior RBI approval. Buying foreign equity is a capital account use, so it counts against that annual cap.
The second is the FEMA (Overseas Investment) Rules and Regulations, 2022, notified on 22 August 2022, which govern how a resident individual actually holds that foreign investment. This is the rulebook founders skip, because the bank processed the payment and nobody flagged a form. The third is Section 206C(1G) of the Income-tax Act, which makes the authorised dealer bank collect tax at source on the remittance itself.
The pain is concrete. Skipping the FEMA reporting is not a paperwork lapse that a late note can fix. It is a contravention under Section 13 of FEMA, and the Reserve Bank issued more than 180 compounding orders for late Annual Performance Report filings alone in 2024-25, with compounding amounts running from about Rs 50,000 to Rs 25 lakh an order. Founders who thought they had made a clean investment discover that the cleanest part of the deal was the wire itself.
The three regimes on one remittance
Before the forms, hold the map in your head. One outbound rupee touches three regulators. Here is how each one treats the same transfer.
| Regime | Regulator | What it controls | Key form / limit | What goes wrong |
|---|---|---|---|---|
| Liberalised Remittance Scheme | RBI (Master Direction on LRS) | How much you can send and for what purpose | Form A2; USD 250,000 per financial year | Crossing the cap across all purposes combined |
| FEMA Overseas Investment Rules 2022 | RBI / AD bank (Schedule III) | How you hold and report the foreign stake | Form FC + UIN before remittance; APR by 31 December | No Form FC, no UIN, no APR |
| Section 206C(1G), Income-tax Act | Income-tax Department (via AD bank) | Tax collected on the remittance | 20% TCS above Rs 10 lakh in a year | Cash blocked till you claim it back in the return |
The TCS layer is the one that surprises people first, because it is a real debit on the day of the transfer. The rates changed with the Finance Act 2025, and the position now, effective 1 April 2025, is set out below.
| Purpose of LRS remittance | Up to Rs 10 lakh / year | Above Rs 10 lakh / year |
|---|---|---|
| Overseas investment, gifts, travel, most other purposes | Nil | 20% |
| Medical treatment and education (not via loan) | Nil | 5% |
| Education funded by a loan from a specified institution | Nil | Nil |
Two points save founders a lot of worry. The Rs 10 lakh threshold was raised from Rs 7 lakh by the Finance Act 2025, so the first Rs 10 lakh of the year carries no TCS at all. And the 20% is not a lost cost. It is tax collected at source, adjustable against your income-tax liability and refundable in your return if you have no matching tax. The catch is cash flow: on a USD 60,000 remittance, roughly Rs 40 lakh is investment and about Rs 6 lakh sits with the department until your return is processed.
What changed, and why 2026 is the year it starts to bite
The outbound rules were quietly tightened over the last three years, and the enforcement plumbing caught up in 2026. Three shifts matter for anyone planning an overseas investment under LRS.
| Change | When | Effect on a founder |
|---|---|---|
| FEMA Overseas Investment Rules 2022 replaced the old ODI regime | 22 August 2022 | Form FC replaced Form ODI; clearer ODI vs OPI test; two-layer limit on subsidiaries |
| TCS threshold raised to Rs 10 lakh, 20% above it | 1 April 2025 (Finance Act 2025) | Larger remittances carry a real cash-flow hit at the bank counter |
| PAN-wise LRS tracking through the CIMS reporting system | From January 2026 | Banks report each remittance against your PAN daily, so the cap and the pattern are visible to RBI |
The August 2025 RBI directive sharpened the stakes further: an entity or person with unresolved overseas investment reporting defaults cannot make any fresh overseas investment until the earlier defaults are regularised. For a founder planning a second tranche into the same foreign company, or a new bet abroad, an old missing APR now blocks the next move. The reporting you skipped in year one becomes the wall you hit in year two.
PAN-wise tracking is the part founders underrate. Until recently, spreading remittances across two or three banks kept the picture fragmented. With daily PAN-level reporting, the USD 250,000 cap is measured across every bank you use, and a remittance for foreign equity that never shows up as a Form FC filing is a visible mismatch.
What you must do now: nine steps before and after you remit
Treat the wire as the last step, not the first. The sequence below is the one a practising company secretary would run for a founder investing abroad.
- Decide whether it is ODI or OPI. Acquiring 10% or more of the equity of an unlisted foreign company, or any stake that gives you control, is Overseas Direct Investment. A smaller stake without control, typically in a listed company, is Overseas Portfolio Investment. The route decides your forms, so settle it first.
- Check that the target is an operating entity. Under Schedule III of the Overseas Investment Rules, a resident individual can invest in an operating foreign company but not in one doing financial services, unless the investment is into an IFSC entity (and even there, not banking or insurance). A foreign holding company with no real operations can fail this test.
- Rule out round-tripping and excess layering. The structure cannot create more than two layers of subsidiaries, and an arrangement where your foreign company invests back into India needs to fit inside that limit. Founders planning a “flip” to a US or Singapore parent hit this rule most often.
- Confirm the LRS headroom. Add up every LRS remittance for the year, across all purposes and all banks. Foreign equity, travel, and gifts all draw down the same USD 250,000 cap.
- File Form FC through your AD bank before you remit. Form FC replaced the old Form ODI. The bank obtains a Unique Identification Number for the foreign entity. The reporting comes before or with the remittance, not after.
- Complete Form A2 and the source-of-funds declaration. The bank needs Form A2, your PAN, and evidence of the source of funds for KYC and AML. Use your designated AD branch for the LRS relationship.
- Budget for the 20% TCS. On the amount above Rs 10 lakh in the year, plan for a 20% collection at the counter. Keep the TCS certificate; you claim the credit against your tax in the return, so it is a timing cost, not a permanent one.
- Diarise the Annual Performance Report by 31 December. For every foreign entity where you hold ODI, an APR is due each year by 31 December. This is the single most missed filing, and the one the Reserve Bank compounds most often.
- If you are already in default, use the LSF window. A delayed APR can be regularised with a Late Submission Fee of Rs 7,500 per return where the delay is within three years. Beyond three years, or for substantive breaches, it goes to compounding under Section 13 of FEMA. Fixing it early is far cheaper than waiting for the query.
The deeper implication for founders building across borders
According to CS Sapna Malpani, the outbound side of FEMA is where founders now carry the most unpriced risk, because the money moves so easily that the compliance feels optional. It is not. A single unreported overseas investment under LRS can sit quietly for years and then surface at the worst moment, during due diligence for a raise, a secondary sale, or the founder’s own exit, when a buyer’s counsel asks for the UIN and the APR history and finds neither.
With PAN-wise LRS reporting live from January 2026 and the 20% TCS creating an income-tax footprint on the same remittance, the data now exists on both sides to match an outbound wire against a missing Form FC. Expect the Reserve Bank and the Income-tax Department to reconcile these two trails more often, and expect the August 2025 “no fresh investment until you regularise” rule to be applied earlier in the cycle. The founders who treat Form FC and the APR as part of the investment decision, rather than an afterthought, will keep the freedom to move capital when the next opportunity appears.
How overseas investment under LRS compares with the filings you already know
Founders confuse the outbound forms with the inbound ones because the abbreviations rhyme. They serve opposite directions. The table below keeps them straight.
| Filing | Direction | Trigger | Who files |
|---|---|---|---|
| Form FC | Outbound | You invest in a foreign entity (ODI) | Resident investor via AD bank |
| APR | Outbound | Annual position of your foreign ODI | Resident investor, by 31 December |
| FC-GPR | Inbound | A foreign investor buys your company’s shares | The Indian company |
| FC-TRS | Inbound | Shares transfer between a resident and a non-resident | The Indian party |
| FLA | Both | Annual foreign assets and liabilities | The Indian company, by 15 July |
ODI and OPI are the other pair worth separating. ODI is the controlling or 10%-plus route, and it carries the Form FC and APR load. OPI is the smaller, no-control route, with lighter reporting. Sending money to your own foreign start-up is almost always ODI, which is exactly why the APR obligation applies. For the inbound counterparts, our guides on FC-GPR versus FC-TRS and the FLA return deadline walk through the reporting most founders meet first.
- ✓ A resident individual can remit up to USD 250,000 a year under LRS, and buying foreign equity draws on that same cap.
- ✓ TCS is 20% on LRS remittances above Rs 10 lakh a year for investment, effective 1 April 2025, but it is refundable against your income-tax.
- ✓ An overseas investment under LRS is almost always ODI, which needs Form FC and a UIN before you remit.
- ✓ The Annual Performance Report is due by 31 December every year, and it is the most compounded FEMA default.
- ✓ A late APR within three years costs a flat Rs 7,500 Late Submission Fee; beyond that, compounding under Section 13 FEMA can reach 3x the amount involved.
- ✓ Since August 2025, an unresolved reporting default blocks any fresh overseas investment until you regularise it.
Sources and references
- RBI, Master Direction No. 7/2015-16 – Liberalised Remittance Scheme (LRS): rbi.org.in Master Directions
- FEMA (Overseas Investment) Rules and Regulations, 2022, and A.P. (DIR Series) Circular No. 12 dated 22 August 2022 (Overseas Investment Directions, 2022): rbi.org.in
- Section 206C(1G), Income-tax Act, 1961, as amended by the Finance Act 2025: incometaxindia.gov.in
- Section 13, Foreign Exchange Management Act, 1999 (penalties for contravention): indiacode.nic.in
- Taxmann, Overseas Direct Investment (ODI) under FEMA and LRS guidelines: taxmann.com
- MMJC, Overseas Investment in Financial Services: mmjc.in
Map your remittance before you send it. Use the FEMA Compliance Calculator to check your LRS headroom and reporting, review our India and international entity management service, or line up your round with fundraising compliance. Questions on a specific transfer? Message CS Sapna Malpani on WhatsApp.
Frequently asked questions
What is the LRS limit for a resident individual in 2026?
A resident individual can remit up to USD 250,000 per financial year (April to March) under the Liberalised Remittance Scheme, for any permitted current or capital account transaction, without prior RBI approval. The cap is cumulative across every purpose, so foreign equity, overseas property, travel, and gifts all draw on the same figure. From January 2026, banks report each remittance against your PAN daily through the CIMS system, so the limit is measured across all the banks you use, not one at a time.
Is the 20% TCS on an overseas investment under LRS a permanent cost?
No. The 20% is tax collected at source under Section 206C(1G), not a separate tax. It applies to LRS remittances for investment above Rs 10 lakh in a year, effective 1 April 2025. You get a TCS certificate, and you claim the amount as credit against your income-tax liability in your return, or as a refund if you have no matching tax. Treat it as a cash-flow cost, because the money sits with the department until your return is processed, not as money lost.
Do I need to file Form FC if I invest a small amount in a foreign start-up?
If the investment is Overseas Direct Investment, yes, regardless of size. Acquiring 10% or more of an unlisted foreign company’s equity, or any stake that gives you control, is ODI, and it needs Form FC with a Unique Identification Number filed through your AD bank before or at the time of remittance. A smaller stake without control may qualify as Overseas Portfolio Investment, which has lighter reporting. Funding your own foreign company is almost always ODI, so the Form FC and the Annual Performance Report both apply.
What is the penalty for not filing the Annual Performance Report?
A delayed APR within three years of its due date can usually be regularised with a Late Submission Fee of Rs 7,500 per return. Beyond three years, or for substantive breaches, the matter goes to compounding under Section 13 of FEMA, where the penalty can reach three times the amount involved, or up to Rs 2 lakh where the amount cannot be quantified, plus Rs 5,000 a day for a continuing default. In 2024-25 the Reserve Bank issued more than 180 compounding orders for late APR filings alone.
Can I invest in a foreign financial services company under LRS?
Generally no. Under Schedule III of the FEMA Overseas Investment Rules 2022, a resident individual can invest in an operating foreign entity but not in one engaged in financial services. The exception is an investment into an entity in an International Financial Services Centre, and even there, banking and insurance are excluded. If the foreign company’s main business is financial services, take advice before you remit, because the structure may not be permitted for an individual.
Does flipping my start-up to a foreign parent trigger round-tripping rules?
It can. The Overseas Investment Rules 2022 do not allow a structure with more than two layers of subsidiaries, and an arrangement where your foreign company invests back into India is scrutinised as round-tripping. A “flip”, where founders set up a US or Singapore holding company above the Indian company, needs to be built inside these limits and reported correctly. Get the layering and the Form FC right at the start, because unwinding a non-compliant structure later during a raise is far more expensive.