International students, foreign travelers, and NRIs – brace for impact! Starting October 1st, 5% TCS will be applicable to foreign remittances & fund transfers under the Liberalized Remittance Scheme (LRS) of the RBI. LRS is a provision under which you are allowed to send $250K outside India in any financial year.
Tax will be applicable on the amount exceeding INR 7 lakh. But the tax on foreign tour packages will be applicable for any amount (no threshold of INR 7 lakh). And for education-related remittances like loans, etc, tax will be only 0.5%.
This provision was introduced as a new sub-section (1G) in Section 206C of the Finance Act, 2020.
What is TCS
Tax Collected at Source (TCS) is an income tax collected by the seller of specified goods, from the buyer. It is a concept where a person selling specific items is liable to collect tax from a buyer at a prescribed rate and deposit the same with the Government.
Let’s take an example to understand the concept of TCS:
Ram purchases jewelry from Yash worth INR 7,00,000. Ram will now be liable to pay INR 7,07,000 to Yash. (Since TCS @1% is added to it)
What is LRS?
Liberalized Remittance Scheme aka LRS is a provision under which you are allowed to send $250K outside India in any financial year. These majorly include expenses related to:
- medical treatment
- maintenance of close relatives
- investment in shares and debt instruments
- buying immovable properties abroad.
Individuals can also open, maintain, and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme. However, LRS does not allow the buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines, and so on.
Money cannot be remitted to countries identified by the Financial Action Task Force as “non-cooperative countries and territories”.
No TCS Will be Applicable if:
- The amount transfered is less than INR 7 lakh and is NOT for buying a tour package.
- Tax is already deducted at source under any other provision of the Income Tax Act (eg. royalty, professional fees, rent transfered overseas to NRI landlord).
- Central and state governments, local authorities, and foreign diplomatic remitters are exempt.
- GST will not be applicable to the TCS amount.
Non-disclosure of PAN or Aadhaar
If PAN and Aadhaar are not provided, the TCS rate increases.
- The rate would be 5% for education-related (eg. education loan as defined in Section 80E) transfers
- The rate would be 10% for any other remittance
How Will TCS on Foreign Remittances Work?
The TCS will be collected
- at the time of the receipt of the amount or
- at the time of debiting the amount payable (whichever is earlier)
An additional surcharge and health & education cess are levied if the buyer is a non-resident person or a foreign company. The sum paid as TCS will be allowed as a credit while furnishing return of income. You can get your monthly TDS reduced if it is a salaried individual. Also, you can adjust it against your advance tax payment when the next instance falls due. The sum can also be collected as a refund, provided there is no tax liability. This is designed to get people who send money abroad to file tax returns. Therefore, if a person does not file his return, the government would get to keep this 5% amount.
An authorized dealer (dealing in foreign exchange or foreign security) or overseas tour operators shall collect the TCS.
Calculation of TCS on Foreign Remittances/Transfers
Case 1: If a sum of INR 10 lakh is transferred under LRS in a financial year, a TCS at 5% will be applicable on INR 3 lakh (INR 10 lakh minus INR 7 lakh). The tax collected will be INR 15,000.
Case 2: If a sum of INR 10 lakh is transferred for the purchase of an overseas tour package, you have to make a payment of INR 10,15,000 (INR 10 lakh plus 5% of INR 3 lakh). (since there is no such relaxation of the INR 7 lakh threshold to buy overseas tour packages)
Why This Rule?
There have been instances of misuse of the window provided under LRS. People send more than the permissible limit to foreign countries as remittances.
According to a statement by the Government-
- A survey of 5,026 samples of foreign remittances took place
- 1,087 did not file any return
- In F.Y. 2018-19, $14B was sent out using LRS
- Compared this to figures of F.Y. 2009-10, less than $1B was sent out using LRS
- No returns were filed for around 24% of the amount sent by these 5,026 remitters
Here is an example. Your local Kirana store owner does not file taxes. But every year he goes on a fancy international trip. Therefore, a provision to collect tax on such transfers was introduced. This will help the department identify those transferring money in excess of the specified limit but not furnishing return of income.
Indian students and tourists going abroad and Indian investors investing in stocks, bonds, and property abroad will be impacted. It increases up-front costs of international travel and remittances to dependents overseas. Example, parents sending money to children studying abroad. This might also reduce disposable cashflows. One will also have to wait for a year, or more, to get their tax refund.
Tour & travel agents can also suffer if people switch to self-bookings instead of buying packages to avoid TCS. On the other hand people might also shift from international travel to domestic travel. This will give a boost to the domestic tourism industry.
The Union Finance Ministry is extending the scope of both tax-deducted at source (TDS) and tax collected at source (TCS). They would now have a better idea of transactions in the Indian economy. Also, they will be able to tally the spending patterns with the reported taxable income.