Should 5% tax on foreign transfers discourage you from investing in US stocks?
From October 1, 5% tax collected at source (TCS) will be applicable on all remittances above ₹7 lakh under RBI’s Liberalized Remittance Scheme (LRS).
The Union Budget 2020 introduced a tax collected at source (TCS) on forex transactions. A 5% TCS will be applicable on all remittances above ₹7 lakh under RBI’s Liberalized Remittance Scheme (LRS). The TCS on foreign remittances will be effective from October 1. TCS will be applicable on foreign investments as well. International funds recently gained popularity due to the fabulous returns in this year. How much will this tax impact global investing, should investors be concerned? Read on to know everything about TCS and investing overseas.
What is LRS or Liberalized Remittance Scheme?
Some basics first. LRS allows a person to remit up to $250,000 (around ₹1.83 crore at an exchange rate of 73.50) in a financial year for expenses such as travel and education, as well as capital account transactions like investing in the foreign stock markets. From next months and onwards, a tax will be collected at source on foreign remittances above ₹7 lakh. It is important to note that the tax is applicable only on the payer, and not on the recipient. The payer will get a TCS certificate and can claim a refund while filing the annual IT returns.
What are the amendments to the TCS Rule?
The Union Budget 2020 introduced a tax collected at source (TCS) on forex transactions. A 5% TCS will be applicable on all remittances above ₹7 lakh under RBI’s Liberalized Remittance Scheme (LRS). The TCS on foreign remittances will be effective from October 1.
"TCS will apply only to the amount over ₹7 lakh in a fiscal year and not on the total amount. For instance, if you remit ₹10 lakh in a financial year, TCS will apply to the excessive ₹3 lakh at a rate of 5%, and thus will incur a tax of ₹15,000," explains, Prateek Jain, Co-founder & President, Winvesta, a global investment platform.
Payments for foreign tour packages are also subject to the 5% TCS. There will be no TCS if you book a foreign tour yourself instead of going through a travel agency.
Remittance for an educational purpose originating from a loan from a financial institution in India, will bear a TCS at a reduced rate of 0.5% on amount exceeding ₹7 lakh.
How much will TCS hurt Indians investing overseas?
International investment planners and experts do not believe that this tax should hurt investors. They say, the tax paid can be claimed later. Here's what the experts said:
“The new Tax Collected at Source (TCS) rule change on forex transactions should not discourage the Indian investors who are looking to invest in US stocks or other global markets. While it increases the initial cost of the foreign transactions, but the increased upfront costs can eventually be claimed back with tax returns. Furthermore, investors remitting less than ₹7 lakh per year (about $9500 at an exchange rate of 73.5) will see no impact of these rules,” said Prateek Jain of Winvesta.
Some other experts said that it is more a way to look at cash management rather than an additional cost for the investor.
"Investors should not alter their decision to invest abroad due to this tax. Once the TCS is paid an investor can offset other tax liabilities during the year to increase the cash available to them if they don't want to wait until the ITR filing date to claim the credit or refund," said Viram Shah, Co-founder and CEO, Vested Finance.
"For regular taxpayers, the TCS will be available as credit or as a refund depending on the taxes they owe. In fact, one can offset their TDS obligations. For example - salaried individuals can reduce their monthly TDS deductions," adds Viram Shah.
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