ODI vs LRS: Owning a US Company from India Under FEMA

Before anyone forms a US company for an Indian founder, one question needs an answer: whose money goes in, and through which door? Under FEMA there are two doors. A resident individual can invest under the Liberalised Remittance Scheme (LRS). An Indian company can invest as overseas direct investment (ODI). Both are legal and common, but they lead to different limits, conditions and paperwork for years afterwards.

Formation platforms will set up a Delaware C-Corp in days without asking this question. The Indian side then gets discovered later, often when a bank asks for the source of funds or an investor's lawyer asks for the FEMA filings, and fixing it at that stage usually means late fees or compounding.

Here is how the two routes compare. The rules sit in the Overseas Investment Rules, Regulations and Directions issued in 2022 and updated since; your AD bank and your India CA apply them to your facts.

What counts as overseas investment in a US company

Buying shares in an unlisted foreign company, or taking control of one, is overseas direct investment in FEMA's language, whoever makes it. Subscribing to shares of your own new Delaware C-Corp, or taking a membership interest in a US LLC, falls in this bucket even when the amount is small.

When the investor is an Indian company, loans to the US company, guarantees for it and pledges of its shares also count towards the financial commitment. That is why the paperwork follows the whole relationship, not just the first remittance.

Route 1: you invest personally under LRS

A resident individual can remit up to USD 250,000 per financial year under LRS for permitted purposes, and investing in a foreign company is one of them. When the investment is in an unlisted company, the Overseas Investment Rules treat it as ODI by an individual, with extra conditions.

The conditions I check first: the US company should be an operating business, not one in financial services, and an individual with control should not use it to hold further subsidiaries. A founder planning a US holding company over other entities, or a lending or investment business, usually does not fit this route.

Tax collected at source (TCS) applies on the remittance above the threshold, 20% for investment remittances above Rs 10 lakh in a financial year. TCS is not a final cost. It is credited against your income tax or refunded, but it ties up cash, so time the remittance.

Route 2: your Indian company invests under ODI

An Indian company can invest in a US subsidiary under the automatic route, without prior RBI approval, if its total financial commitment abroad stays within 400% of its net worth as per its last audited balance sheet. Equity, loans, guarantees and certain pledges all count towards that limit.

This route suits a business that already runs in India and wants a US sales arm, a US contracting entity, or a US company to hold US-facing assets. Ownership stays inside the Indian company, which matters for consolidation, for its own investors and for any future listing in India.

The trade-off is that the Indian company now owns an overseas subsidiary and carries every annual filing that comes with it. Money coming back, whether as dividend, service fee or loan repayment, has to be documented properly on both sides.

Side by side

The short version, before the fine print:

Neither route is cheaper by default. The right one depends on who should own the US company five years from now, and whether the investors in your Indian company should share in it.

• Who invests: under LRS it is you personally; under ODI it is your Indian company.
• Money limit: LRS is USD 250,000 per person per financial year, and family members can add their limits only as genuine shareholders; ODI is up to 400% of the company's net worth.
• Structure: LRS carries the operating-business and no-step-down conditions; ODI allows subsidiaries within the layering rules.
• Cash on the way out: TCS applies to LRS remittances above the threshold, while ODI by a company does not attract TCS.
• Cash on the way back: under LRS, dividends reach you personally; under ODI they reach the Indian company first.

The reporting that follows either route

The paperwork starts when the money goes. Form FC is filed through your AD bank at the time of the financial commitment, and for a company the bank also checks the net worth limit. After that, the US company becomes a recurring item on your India calendar.

Individuals who make ODI generally file the APR too, subject to limited exemptions, while the FLA return applies to Indian entities rather than individuals. Confirm the list with your AD bank at the time of the first remittance.

• Annual Performance Report (APR) for each overseas entity by 31 December each year, based on its accounts.
• Foreign Liabilities and Assets (FLA) return by 15 July each year for an Indian company with overseas investment.
• Schedule FA in the income tax return of every resident who holds the shares or signs on a foreign account.
• A missed filing can usually be regularised with a late submission fee, or through compounding, which is slower and costlier.

Round-tripping, flips and money coming back

The Overseas Investment Rules restrict structures where Indian money goes out and comes back into India through the foreign company, and they limit how many layers of subsidiaries you can stack. A US company that invests back into India, or that is placed on top of your existing Indian startup, needs a written check before anything is signed.

Putting a US parent over an Indian company is a flip. It involves share swaps, valuation, Indian tax and FEMA approvals of its own, so treat it as a separate project rather than a variation of a simple US setup.

Money coming back needs a clean trail too: dividends, service fees and loan repayments should carry invoices, board approvals and bank advices, so that the income is reported correctly in India.

Mistakes to avoid

Most FEMA problems on US companies come from sequence, not from the rules being hard.

Decide the route and write it down before the first dollar leaves, and keep every bank acknowledgement in one file. The APR, the FLA and Schedule FA all draw on it.

• Forming the US company online, then sending money from a personal account with no ODI reporting.
• Paying US setup costs personally and later treating them as share capital without paperwork.
• An Indian company paying its US subsidiary's bills before Form FC is filed.
• Moving Indian customers or IP into the US company without checking transfer pricing and FEMA.

Frequently asked questions

Can I invest in my own US startup under LRS?

Generally yes, if it is an operating business outside financial services and the other overseas investment conditions are met, within USD 250,000 per financial year. Your AD bank will ask for the company documents.

Does my Indian company need RBI approval to set up a US subsidiary?

Usually not. Most cases fall under the automatic route within 400% of net worth, handled through the AD bank. Approval is needed only for cases outside the automatic route.

What if I never reported my US company investment?

It can usually be regularised through a late submission fee or compounding, depending on the lapse and the time passed. The sooner it is fixed, the simpler it is.

Is TCS a real cost when I remit for my US company?

TCS of 20% above Rs 10 lakh in a financial year is collected by the bank, but you can claim it against your income tax or as a refund. It is a cash flow cost, not a final tax.

Related guides

• ODI reporting: APR and FLA annual compliance
• LRS outward remittance window for Indian residents
• Overseas Direct Investment (ODI) compliance
• USA company registration from India