5% tax on foreign tour, investments and study abroad from today: Details here

Authorised dealers, typically banks and remittance companies will collect 5% tax at source (TCS) once LRS remittance(s) made by an individual crosses 7 lakh in a financial year. This new rule goes live from today, i.e., October 1. Does it add to the cost of fund transfer abroad? Not really. "The tax paid should not confuse it as an additional cost or tax on the fund transfer. The TCS will be reflected as tax credit in your Form 26AS. So, the amount of TCS can be claimed as credit against tax payable while filing income tax returns. In case the TCS is higher than your tax payable, you will get a refund," says Viram Shah, Co-Founder and CEO, Vested Finance.

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. Now, a tax will be collected at source on foreign remittances above Rs7 lakh.

The tax is applicable only on the payer, and not on the recipient.

How will 5% TCS be calculated?

The 5% tax is collected at source only on the amount above 7 lakh. For example, if you remit ₹10 lakh in a year, 5% will be calculated on 3 lakh i.e. ₹15,000 will be deducted as TCS.

How will 5% TCS be calculated for the current financial year?

For the current financial year, any remittances made post March 2020 will count towards the 7 lakh threshold. Viram Shah explains, "If you have transferred ₹6 lakh before October and you transfer additional ₹5 lakh after October this year, then the 5% TCS will be calculated on ₹11 lakh - Rs7 lakh = ₹4 lakh. So, 5% of 4 lakh which is ₹20,000 will be debited as TCS."

But if you have already made remittances more than ₹7 lakh before October 2020, no TCS is payable.

How much TCS will be deducted on foreign tour packages?

Payments for foreign tour packages are also subject to the 5% TCS without any exemption threshold. There will be no TCS if you book a foreign tour yourself instead of going through a travel agency.

How much tax will be collected on remittance for an educational purpose?

If educational expense is financed through a loan, a TCS of 0.5% on transfer amount above the threshold of ₹7 lakh will be deducted.

If educational expenses is not financed through a loan, 5% tax on amount transferred amount above the threshold of ₹7 lakh will be deducted.

Should tax collected at source discourage overseas investments of Indian investors?

Investment planners do not believe so. They believe it is more a way to look at cash management rather than an additional cost for the investor.

"The new 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," says Prateek Jain, Co-founder & President, Winvesta, a global investment platform.