New tax rule (TCS) explained: Foreign transactions under LRS

 

The Finance Minister Nirmala Sitharaman has suggested some changes to the rules about sending money from India to other countries in the Union Budget for 2023. Currently, people in India can use the Liberalized Remittance Scheme (LRS) to send money abroad for things like education, medical treatment, and business purposes. The new proposal will increase the Tax Collection at Source (TCS) rate from 5% to 20% for foreign remittances other than for education and medical purposes, starting from July 1, 2023. However, for education and medical purposes, the TCS rate will remain at 5%. If the money for education abroad comes from a loan from a financial institution, the TCS rate will be 0.5%. You can see the current and proposed TCS rates in the table below:

 

Type of Remittance Abroad	Present TCS Rate	Proposed TCS Rate
For the purpose of education & medical treatment	5% of the amount or the aggregate amount over Rs. 7 lakh	No change
For the purpose of education (Funds sourced through an education loan)	0.5% of the amount or the aggregate amount over Rs. 7 lakh	No change
For overseas tour packages	5% without any threshold limit	20% without any threshold limit
For any other purpose	5% of the amount or the aggregate amount over Rs. 7 lakh	20% without any threshold limit

 

Please note that TCS is not an additional charge and can be adjusted against your total income tax liability & claimed while filing tax returns. One can also claim a refund if the remittance is from an income that is already tax-deducted at source (TDS).

 

What Is the Liberalized Remittance Scheme (LRS)?

A resident individual can transfer money abroad to the limit of USD 2,50,000 per financial year. It falls under the LRS which is created by the Reserve Bank of India. This LRS limit can be carried out as a one-time transaction or through multiple transactions.

Examples Of TCS Application On Foreign Remittance Through Liberalised Remittance Scheme (LRS)

Here we take a few examples to explain to you the tax implications on foreign remittance.

Case 1

Let’s assume someone has made the following remittances during FY 2020-21:

Transaction 1 – Rs. 5,00,000

Transaction 2 – Rs 8,00,000

Transaction 3 – Rs 1,50,000

TCS applicability transaction wise is as under:

Transaction	TCS Applicability
Transaction 1 – Rs. 5,00,000	No Tax will be collected since the amount is below Rs 7,00,000/-
Transaction 2 – Rs 8,00,000	20% TCS will be applicable on Rs 6,00,000
	[(Rs 5,00,000 + Rs 8,00,000 = Rs 13,00,000) – Rs 7,00,000 = Rs 6,00,000]
Transaction 3 – Rs 1,50,000	20% TCS will be applicable on Rs 1,50,000 entirely since Rs 7,00,000 limit has been exceeded in transaction 2 only.

Case 2

Now let’s assume that someone has taken an education loan of Rs. 8,00,000 from a Financial institution and wants to remit funds for an education Fee of Rs. 15,00,000

TCS application as per the amendments will be as below:

0.5% TCS on Rs. 1,00,000
5% TCS on Rs. 7,00,000

Case 3

Let’s assume that someone remitted Rs. 15,00,000 in April 2023, will he be liable to pay 20% TCS?

Well, no, this rule only applies to the remittances made on after July 1, 2023 and hence, the old TCS rate will apply in this case.

Can you get the TCS money back?

Yes, most certainly. This tax is just like TDS (Tax deducted at source) that is cut on your salary for which you can claim a tax refund while filing the income tax return. It will be reflected in your Form 26AS.

Frequently Asked Questions (FAQs)

Part 1

Q1. What is the effective date of implementation of the new tax implication?

A: The implementation of new TCS provision on foreign remittance is July 1, 2023.

Q2. What transactions will be impacted by this TCS provision?

A: All remittances (other than for education and medical purposes) more than INR 7 lakh in a financial year done under the LRS will be liable for a 20%. The TCS for education and medical treatment is 5%, and 0.5% for remittances, where funds for education have come from a loan.

The exemption from TCS on remittance overseas under LRS for amounts less than INR 7 lakh in a financial year will not be applicable if the amount is being remitted for the purchase of an overseas tour program package.

Q3. Will GST be applied to the Tax collected at source (TCS)?

A: No GST will be applied to the tax collected at source (TCS). Though, GST will be charged when you convert the currency and use a remittance service for its usage.

Q4. What are the different purposes for which tax collection is applicable?

A: The tax will be applicable to all remittance(s) out of India that fall under the Liberalized Remittance Scheme (LRS) of RBI.

Q5. What Tax will be applied in the case of Non-PAN transactions?

A: TCS for Non-PAN transactions will be 40% although no LRS transaction is possible without PAN.

Part 2

Q6. Whether TCS on foreign remittance through Liberalised Remittance Scheme (LRS) will be applicable on the entire amount of remittance or only on an excess of Rs 7 Lacs?

A: TCS shall be applicable only on the amount in excess of ₹ 7 lakhs in a financial year and not on the total amount.

Q7. What if the customer bought forex of Rs. 10,00,000, paid TCS and then encashed Rs. 5,00,000. Will the TCS be refunded back or will apply again?

A: No, TCS once paid can only be claimed at the time of IT returns if the cumulative Tax is lesser than what is already paid. Also, no TCS will be applied for encashments/Unload orders.

Q8. What if a customer bought a tour worth of Rs. 6,00,000 and now wants to remit forex worth of Rs. 2,00,000, what will be the TCS?

A: There will not be any TCS applied on the forex as the availed forex limit within FY is under Rs. 7,00,000.

Part 3

Q9. When a Resident Indian transfers to NRO Account towards Gift/Loan under LRS, will TCS be applicable?

A: There will not be any TCS applied on such transfers until it does not cross the limit Rs. 7,00,000 in a financial year.

Q10. What is the new tax implication on remittances for pursuing overseas education?

A: For remittances that carry the purpose of overseas education, TCS will apply at a rate of 5% and

0.5%, only in the case if the amount remitted is originating through a loan from a financial institution.

For example, let’s say that the total amount is INR 12 lacs. TCS at 0.5% will be applicable on Rs. 5,00,000 (Amount after Rs. 7 lac is taken into account and source of funds is a loan) & tax collected in this case will be Rs. 2,500.

Q11. What is the tax implication if the amount remitted for pursuing overseas education is through own savings and not through a loan?

A: A 5% TCS will be applied on remittances crossing INR 7 lakhs in a financial year under LRS.

Q12. What is the tax implication for remittances to Foreign Tour Operator under LRS?

A: TCS at 20% will be applicable once the amount crosses the Rs. 7,00,000 limit in a financial year.

Part 4

Q13. Will TCS (Tax Collected at Source) be applicable if foreign exchange facility is availed in Cash or Forex cards?

A: Yes, it will be applicable. TCS at 20% will be applicable when foreign exchange currency is obtained while withdrawing the cash at branches or when you reload your forex card.

Foreign Exchange facility availed through FCY Cash or Forex cards towards Overseas Education out of a loan from a Financial Institution attracts TCS @ 0.5% on drawl exceeding INR 7 lakhs in a Financial Year under LRS (TCS @ 5% shall be applicable in case amount drawn is not obtained out of loan from a Financial Institution).

FCY Cash or  Forex Cards availed towards Overseas or Foreign tour programme, will attract TCS @ 20% and the amount drawn shall not be included under the aggregate threshold limit of INR 7 lakhs.

Q14. In case of minor accounts, the threshold limit (INR 7 lakhs) of the minor or guardian will be utilized?

A: If the PAN updated on the account is of the Minor, the threshold limit of the Minor will be utilized. In case if the PAN of guardian is there on that particular account, the guardian’s financial year limit of Rs. 7 lakhs will be used. As a result, TCS will also be collected in the guardian’s name.