Understanding the nuances of the recent amendments in TCS provisions
3 min read 23 May 2023, 10:29 PM ISTThe Union budget 2023 has increased the TCS rate on foreign remittances made under LRS from the existing 5% to 20%, w.e.f. 1 July.
PremiumIt was in 2020, when the levy of tax collected at source (TCS) was first introduced in the Legislature, under sub section (1G) of section 206C of the Income Tax Act, on foreign remittances made under the Liberalised Remittance Scheme (LRS), and on Overseas Tour Packages, including overseas travel, hotel, lodging and boarding expenses.
Under LRS, all resident individuals, including minors, are allowed to freely remit outside India, up to $250,000 per financial year, for any permissible current and/or capital account transaction, without prior approval of the Reserve Bank of India (RBI).
The Union budget 2023 has increased the TCS rate on foreign remittances made under LRS (other than medical treatment and overseas education), like investments in shares, bonds and securities abroad, donations, gifts, and living expenses of relatives abroad, and on overseas tour packages, from the existing 5% to 20%, w.e.f. 1 July, and there is no threshold exemption limit in respect of such remittances. The TCS rate for foreign remittances for education and medical treatment abroad has been kept same at 5% and for education abroad through loans from approved financial institutions at 0.5%, respectively, for remittances in excess of ₹7 lakh, in a financial year. The TCS rate of 5% is applicable on LRS spends made directly to the foreign medical or educational institution towards their fees, and also on indirect travel and incidental expenses related to education and medical treatment abroad, subject to the furnishing of documentary evidences.
W.e.f. 16 May, international credit card payments, made by resident individuals, on foreign visits, are also counted in the threshold permissible LRS limit of $250,000 per year. Accordingly, TCS rate on such international credit card payments made on or after 16 May will be 5% up to 30 June and 20% or 5% w.e.f. 1 July. A threshold exemption limit of ₹7 lakh has now been provided for payments made through international credit and debit cards, by resident individuals, travelling abroad.
The aggregate LRS spending of resident individuals, in a financial year, are compiled and monitored by RBI, based on the Permanent Account Numbers (PANs) of such individuals.
So, if a resident individual is making LRS spends through more than one authorised dealer or banker, or more than one international debit or credit card, then the threshold exemption limit of ₹7 lakh in a year, will be considered in respect of all such authorised dealers or bankers or debit or credit cards, taken together, and not per authorised dealer, or banker, or debit card, or credit card, independently.
Picture this: Mr. Srinivasan makes foreign remittance of ₹5 lakh towards medical treatment of his wife in the US on 1 July, by exchanging equivalent USD from an authorised money changer. On 31 August, he makes further foreign remittance of ₹2 lakh through his banker, towards education fees of his daughter who is studying in the UK, and additionally incurs an expenditure of ₹1 lakh towards his daughter’s hostel fees, through his international credit card with HDFC Bank. Mr. Srinivasan makes foreign remittance of ₹3 lakhs towards investments in US stocks via his investment banker on 30 September. On 1 January, 2024, he books an overseas tour package of ₹4 lakh to Europe from a tour operator. In this example, the threshold exemption limit of ₹7 lakh will be considered for his LRS remittances in respect of ₹5 lakh towards medical treatment of his wife, ₹2 lakh towards education fees and ₹1 lakh towards the hostel fees of his daughter. So, LRS remittance of ₹1 lakh in excess of the threshold exemption limit of ₹7 lakh will be liable for TCS collection by HDFC bank at 5%, or ₹5,000, subject to furnishing of hostel fees receipts.
The remittances of Mr. Srinivasan of ₹3 lakh for investing in US Stocks and overseas tour package of ₹4 lakh, will be liable for TCS collection at 20% i.e., ₹60,000 and ₹80,000 by the investment banker and tour operator, respectively, either at the time of remittance or at the time of debiting the amount payable, whichever is earlier, and without any threshold exemption limit.
Mr. Srinivasan can take the credit of the total TCS amount of ₹1,45,000, while depositing his advance tax and self-assessment tax as he files his return of income for FY24, or can claim a refund of this amount, if there is no income tax liability. However, interest on such refund, will be calculated only from the beginning of FY25, till the grant of such refund.
Mayank Mohanka is the founder of TaxAaram India and a partner at S M Mohanka & Associates.
