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Be aware of taxes on outward remittances

As more Indians send money abroad, tax regulation on such transactions come into increased focus

Outbound remittances by Indian individuals stood at $380.3 million as of July 2015, a big jump of 170% over June 2015 data, according to data from the Reserve Bank of India (RBI). In fact, remittances have increased four times year-on-year—outbound remittances were at $90.2 million in July 2014.

This is the first time that outbound remittances have gone beyond the $200-million mark in a single month. This amount includes remittances made under the Liberalized Remittance Scheme (LRS) for resident Indians. “The increase in the limit under the LRS ceiling to $2,50,000 per individual per financial year by the RBI could be a major factor for the increase in outbound remittances," said Girish Vanvari, national head of tax, KMPG (India). The LRS limit was raised in February 2015.

Under LRS, individuals can remit in foreign exchange for purposes such as maintenance of relatives, education abroad, medical treatment and investments. In July 2015, the highest increase in remittances was seen under the head of ‘maintenance of close relatives’, at $124.2 million as against $11.1 million last year. People also sent money to students abroad, to the tune of $113.9 million, a six-fold increase over last year. But this is no surprise since June-July is the time when students join courses, especially in the US and the UK. According to the US embassy in India, there has been a 60% rise in student visas issued this year between 1 October 2014 and 30 September 2015.

The third highest remittance was seen under ‘gift’—$52.8 million was sent abroad in the form of gifts, up 77% year-on-year. Using money to buy immoveable property abroad has also increased. Property-related remittances went up from $0.8 million last year to $7.4 million in July 2015. Foreign deposits have also increased significantly. RBI data shows that remittance to deposits abroad has gone up from $4.2 million in July last year to $10 million in July 2015.

Tax implications

If you remit money abroad, you need to understand the tax implications of these transfers, including the need for Permanent Account Number (PAN), declaration in income-tax form, and limits.

It is mandatory to have your PAN for remittances. However, if remittances are for current account transactions of up to $25,000 then it is not needed.

“Having analysed the nature of the transaction, the remitter has to adhere to the compliance formalities such as filing of the relevant forms with an authorized dealer," said Vanvari.

“The nature of the remittance has to be specified in Form A2, which deals with remittance under LRS," said Uday Ved, senior tax expert and a practising chartered accountant.

Form A2 is available with the bank through which you remit, or you can download it from the RBI website. The form will have details with regards to your remittance along with a declaration by you that the amount has not exceeded the limits prescribed by the central bank.

If you are not sure of the tax or other implications of the money that you are sending abroad, take the help of a chartered accountant. This is because there are now strict rules regarding remittances, and the penalties are heavy.

“Section 195 of the Income-tax Act, 1961, provides that any payment to a non-resident requires appropriate TDS (tax deducted at source) if such payment is chargeable to tax in India. Thus, only remittances in the nature of income are subject to TDS," said Ved.

So, typically you would be paying TDS only if you receive income from abroad or purchase assets abroad.

Remitting to buy immoveable property and income from assets abroad is also subject to tax. “Any acquisition of assets abroad would have to be disclosed in the tax returns of the individual. One would also need to disclose details regarding their bank accounts abroad and income from foreign countries," said Suresh Surana, founder, RSM Astute Consulting Group, an auditing and accounting firm.

The penalties for non-filing and non-disclosure are heavy. “There is a 12% per annum interest on tax payment default and penalties for avoiding tax, which ranges from 100-300% of tax sought to be avoided. Penalty is levied for concealment of income or furnishing inaccurate particulars of income for the recipient tax payer," said Ved.

Penalty of 10 lakh will also apply if wrong information is furnished. But it does not apply to assets whose value is 5 lakh or lower. Also, income from foreign assets may be taxed in India, but money sent as gift to specified relatives may not be taxable here.

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