BackTax on LRS remittance is not an additional cost. Here's all you want to know
The 5% tax is deducted only on the remittance amount above 7 lakhTCS on LRS remittance will come into effect on October 1
PremiumBy Viram Shah
From October 1, authorised dealers, typically banks and remittance companies will collect 5% tax at source once LRS remittance(s) made by an individual crosses 7 lakh in a financial year. But, the tax paid should not be confused 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. The Union Budget 2020 proposed a 5% TCS (Tax collected at Source) on remittances undertaken via the Liberalised Remittance Scheme (“LRS") above ₹7 lakh. This new rule goes live from October 1st 2020.
Two important notes here:
1) The 5% is deducted only on the amount above 7 lakh. For example, if you remit Rs10 Lakh in a year, 5% will be calculated on 3 lakh i.e. ₹15,000 will be deducted as TCS
2) For the current financial year, any remittances made post March 2020 will count towards the 7 lakh threshold. For example, if you have transferred ₹6 lakh before October and you transfer additional ₹5 lakh after October 2020, then the 5% TCS will be calculated on IRs 11 lakh - ₹7 lakh = ₹4 lakh. So, 5% of 4 lakh which is ₹20K will be debited as TCS
- Note that no back-dated TCS will need to be paid. So in case you have already made remittances more than INR 7 lakhs before October 2020, no TCS is payable
Some purposes have different TCS applicable. Here’s a quick summary by purpose:
Why did the government introduce this TCS?
The step was taken after a study conducted by the Income-tax Department showed that a large number of individuals sending out money had not filed income tax returns. One would expect that people remitting large amounts would be paying income taxes. However, of the 5,026 selected cases of foreign remittances, data showed that 1,807 did not file returns.
So, the government decided to introduce this TCS to widen the tax net and get tax evaders to start paying tax and NOT to further burden the existing taxpayers.
You don’t want to wait till the end of the year to claim this 5%
You don’t need to wait till the end of the year! You can leverage this TCS to reduce other tax obligations that you might have during the year to increase your in-hand cash. Here are a couple of common scenarios to show how you can offset your tax payables by the upfront TCS amount you pay.
Scenario 1: Google employee with a 20 lakh annual salary
- Rahul who works at Google wants to remit ₹10 lakh (about $13,000) to invest in the US markets
- His monthly salary includes a ₹15,000 TDS or Tax Deduction at Source
- This TDS can vary based on how the salary is structured, but ₹15,000 is a reasonable estimate
- Under the new rule, the bank through which he undertakes the remittance will deduct ₹15,000 as TCS
- Now Rahul has two options:
1) He can claim the 15,000 as credit when he files his income taxes and reduce his tax payable then, or
2) He can submit his TCS certificate to Google and get his monthly TDS reduced by ₹3,000, thus increasing his in-hand salary
Scenario 2: Business owner (proprietor) with 30 lakh as annual profits
- Megha operates a business where she’s the sole proprietor. The business generates ₹30 lakh in annual profit
- She pays advance tax of ₹2 lakh every quarter
- She now wants to invest ₹20 lakh in the international markets. On this remittance, ₹65,000 will be deducted as TCS on the 13 lakh that is above the 7 lakh threshold
- While she can claim the ₹65,000 as credit at the end of the year. She can also reduce her advance tax requirements by ₹65,000 to get the credit for the TCS even before the year end tax filings
(The author is Co-Founder and CEO, Vested Finance. Views as expressed by the author.)
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