- Date : 14/08/2023
- Read: 5 mins
Learn everything about tax collected at source (TCS) on foreign remittances.
In India, there is a wide category of taxes that you pay to the government. Income tax, Goods and Services Tax (GST), property tax, etc., are some common examples. There is another type of tax, known as Tax Collected at Source (TCS), that is paid by buyers in the case of the purchase of some products.
Tax Collected at Source (TCS) is a form of income tax procured by the seller of certain goods from the buyer. This happens when a person selling those items is responsible for collecting tax from the buyer at a predetermined rate and depositing the amount with the government.
- TCS rate increased from 5% to 20% for foreign remittances, except for education and medical purposes
- For foreign remittances, TCS will not be applied if the individual makes all arrangements of the foreign tour on their own
- TCS will also not apply if the remittance has been reduced under TDS, according to the Income Tax Act, 1961
Who is liable to collect TCS?
All sellers of some specific goods shall collect TCS from the buyers of the goods. TCS will be collected in the following circumstances:
- When an amount is debited which is payable by the buyer, or
- When receipt of such amount from buyer is received, whichever is first.
Apart from paying tax on foreign remittance, TCS is also applicable on the following things:
Related Article: Your child’s foreign education: can you afford it?
TCS on foreign remittance
In the Budget 2023, the TCS on foreign remittance under the Liberalised Remittance Scheme (LRS) was increased from 5% to 20%, except for remittances related to education or medical treatment. This means that if a remittance is made for a loan taken for higher education, the TCS rate applied is 0.5% of the amount remitted. A new sub-section (1G) in Section 206C has been created for this purpose.
The remittances for which TCS will be applied are the ones where money is sent outside the country under the RBI’s LRS or for buying foreign tour packages. Under LRS, resident individuals are allowed to remit up to $250,000 per financial year to pay for costs related to travelling, medical treatment, studying, gifts and donations, maintenance of close relatives, among other activities.
Further, the remitted amount can be invested in shares, debt instruments, and to buy immovable properties outside India. Individuals can also create, maintain, and hold foreign currency accounts with banks outside India for making transactions permitted under the plan. But LRS does not permit buying and selling of foreign exchange out of the nation or purchase of lottery tickets or sweepstake schemes, proscribed magazines, etc. Also, money cannot be remitted to countries classified by the Financial Action Task Force as non-cooperative countries and territories.
Amounts above Rs 7 lakh will attract TCS on foreign remittance, provided the tax has not already been deducted at source (TDS) on that same amount. TCS will be applicable on the amount if it is in excess of Rs 7 lakh in a financial year and not on the total amount.
Here’s an example to get a better understanding of foreign remittance tax in the case of TCS. Let us assume the total foreign exchange platform availed of under LRS in one financial year is Rs 10 lakh, and the person wants to remit the amount outside the country. In this case, TCS on foreign remittance at 20% will be applicable on the Rs 3 lakh. (Rs 10 lakh minus Rs 7 lakh) and tax collected will be Rs. 60,000 (20% of Rs. 3 lakh). Furthermore, a person remitting Rs 10 lakh for any reason (apart from foreign payment of any tour package) has to make a payment of Rs. 10,60,000 (Rs. 10 lakh plus 20% of Rs. 3 lakh).
The idea behind the inclusion of TCS on foreign remittance is that the income tax department has concluded that the amounts paid by the people outside India do not correlate with their income tax returns filed. So, tax shall be collected on any amount or aggregate of the amount in excess of Rs 7 lakh if the remittance is made for a purpose other than for the purchase of a foreign tour package.
For people planning to go for higher studies abroad, and those who have taken an education loan from a financial assistance provider, TCS shall be 0.5% on the amount exceeding Rs 7 lakh, as defined in section 80E. If the buyer does not furnish their PAN or Aadhaar card, tax shall be collected at the rate of 10%. If the amount is remitted for various other purposes under LRS, the tax collected shall be at the rate of 5% (if the buyer has furnished PAN or Aadhaar card) or 10%.
How will TCS on foreign remittance be collected?
According to the scheme, TCS shall be collected at the time of receiving the amount, or when the amount is debited, whichever is earlier. The rates might increase further under the Health and Education Cess if the buyer is an NRI or a foreign company.
TCS shall be collected by the authorised dealer or seller of the package. Under the RBI’s LRS, individuals can remit a maximum of $250,000 abroad every year. One should give correct details when dealing with banks, tax-related matters etc. The person should check that TCS credit has come to their account by going to the income tax website.
For any ethical person, there’s nothing to worry about after October 1. For foreign remittances, it is important to note that TCS will not be applied if the individual makes all arrangements of the foreign tour on their own. It will also not apply if the remittance has been reduced under TDS, according to the Income Tax Act, 1961.
Read more on Tax Planning here.