Tax collection at source @ 20% on foreign remittances
Effective from 1st October 2023, Tax Collection at Source (TCS) provisions & rates have been changed. Earlier rate of TCS of 5% has been revised to 20% in respect of various categories of payments forming the part of foreign remittances. One may recall that the Finance Act – 2023 has also removed the threshold of Rs 7 lakh for all purposes other than education and medical treatment. As a result, all foreign remittances under the Liberalized Remittance Scheme (LRS) are liable for TCS @ 20%. However, if the person remitting establishes that the money has been sent for education purposes or medical purposes then the TCS will be required to be done @ 5%. TCS rate shall be 0.50% if the remittance is for education purpose and is funded by taking the education loan from specified entities. Credit card payments for foreign travel have been brought under the purview of the Liberalized Remittance Scheme (LRS) of the Reserve Bank, to ensure that such expenses do not escape TCS.
Let us know about the new TCS rules as applicable from 1st October 2023 for various foreign remittances:
- Educational Purposes:
If the foreign remittances is for educational purposes then Tax Collection at Source (TCS) provision is not applicable if the amount sent is not exceeding Rs 7 lakhs. However, if the remittance for education exceeds Rs 7 lakhs then TCS at the rate of 5% shall be applicable. However, there is a concessional rate of TCS of just 0.50% instead of 5% if the remittance for education is funded by a loan from specified person/financial institutes. As a result, if the education expenses are funded by loan then TCS would be applicable on an amount exceeding Rs 7 lakhs and the TCS rate would be meager 0.50%.
- Medical Purposes:
Any remittances for the purpose of medical purposes is liable for TCS if the amount crosses the threshold limit of Rs 7 lakhs.
[One may note that The Ministry of Finance has already clarified that the rate of TCS remains consistent for all the ancillary expenses related to both medical and educational treatments. It means that expenses such as hostel fees for a child studying abroad can also be considered as funds remitted for medical purposes].
- Foreign Tour:
Till 30thSeptember-2023, foreign tour packages were subject to TCS @ 5% without any specific threshold limit. It was applicable to all the entire cost of the tour package.
Starting from October 1st, purchases of overseas tour packages up to Rs 7 lakhs in a financial year, TCS of 5% will continue to apply.
However, if the total cost of the tour package surpasses Rs 7 lakhs then a higher TCS rate of 20% will be applicable. It is expected that the significant increase in TCS will regulate outward overseas remittances, including various expenses like bank account transfers, forex card loading, foreign exchange, travel expenditures, and business trips.
[To determine the applicability of TCS on the purchase of overseas tour program packages, CBDT circular No. 10/2023 provides specific guidelines. It states that the purchase of only an international travel ticket or hotel accommodation on a standalone basis does not qualify as an “overseas tour program package.” To be considered as such, the package should include at least two components from the following:
a) International travel ticket
ii) Hotel accommodation (with or without food, boarding/lodging, etc. ), or
ii) Any other similar expenditure.
If the total amount spent on an overseas tour program package is less than Rs 7 lakh during a financial year, TCS will be applicable at a rate of 5%]
Any remittances for making investments abroad such as for purchasing stocks, mutual funds, and cryptocurrencies etc, TCS rate of 20% will be applicable if the investment amount exceeds Rs 7 lakhs. However, if the investment falls below this threshold limit, no TCS will be imposed.
However, if one invests in domestic mutual funds which have exposure to foreign stocks, it will not be considered as remittance under the Liberalized Remittance Scheme (LRS) and, therefore, will not be subject to TCS.
- Credit Card Transactions:
Earlier, Credit card transactions were not governed by the Liberalized Remittance Scheme (LRS) & so the TCS provisions were not applicable at all. Now, the foreign remittances through credit card will also be subject to the TCS.
TCS is a new source of tracking transactions of foreign remittances. The study suggests that around $1.5bn (Rs 10,990 crore) on an average is remitted abroad by Indians every month for travel, education, medical treatment, investment in equity, debt/ immovable property, gift, donations, relatives, etc. The liberalized Remittance Scheme (LRS) by RBI permits an individual to freely make overseas remittance of the fund. Indians who have someone abroad or going overseas for studies, vacation, medical treatment, etc utilizes this route to remit money within the prescribed limits Even though the TCS is not a tax by itself & it is adjustable or refundable at the time of filing income tax return, it is sure to result in the blockage of the fund of the taxpayers. This move to enhance the TCS Rate to 20% is definitely a big blow on the citizens. Only relief could be to the parents and students remitting the sum for education or for the person remitting the amount for medical purposes. However, they’ll still be impacted to an extent as they would need to prove by documentation that their remittance is for education purposes. Otherwise, they won’t be able to avail the discounted and concessional TCS rates for the same.