The Union Budget of 2023 introduced some significant changes in taxation, including some concerning foreign remittance. Of course, the most noteworthy change was the increase in tax collected at source on remittances. To be specific, TCS on foreign remittance was hiked to 20% from the earlier rate of 5%.
The Liberalised Remittance Scheme (LRS) was launched by the Reserve Bank of India (RBI) for Indian residents to allow them to remit money abroad for purposes such as education, traveling, investment, etc. This blog post will explain how TCS works under LRS and how to use it in income tax filings. Let’s dig in.
Understanding TCS in foreign remittance transactions
Tax Collected at Source (TCS) is primarily a tax collection mechanism. In the context of the foreign remittance tax, you have to pay the tax whenever you send money abroad. Let us understand this in context.
Currently, under the Liberalised Remittance Scheme, Indian residents can remit up to $250,000 in a financial year for specific purposes under the following heads. These include:
- International travel
- Foreign education
- Investment in stocks, bonds, or real estate in foreign countries
- Medical treatment overseas
Ealier, the TCS on foreign remittance was either nominal or exercised in limited cases only. The recent change provided for a 20% TCS on payments made to a person or entity abroad, without any distinction between the sender’s profession, from students to businessmen to investors.
The new update about tax on foreign remittance
Significant changes in the TCS on foreign remittance were introduced in the Union Budget 2023 where a provision was made to deduct TCS at the rate of 20% on LRS remittances, effective October 2023. This was in line with other measures taken by the government to improve tax remittance and monitor cross-border transactions.
Key aspects of the new update on tax on foreign remittance:
If you talk about the general remittance, then the 20% TCS is levied on most of the foreign remittances, including travel and investments. Here is the table that compares the previous rule and the current rule which will help you understand the changes better, including the LRS scheme limit.
| Type of Remittance | Previous Rate of TCS | New Rate from 1 October, 2023 |
| For educational purposes (educational loan from any financial institution) | 0.5% of the amount that exceeds Rs. 7 lakh | Nil till Rs. 7 lakh and 0.5% if it goes above Rs.7 lakh |
| For the purpose of education other than the above or for the purpose of medical treatment | 5% of the amount or the aggregate of the amount above Rs. 7 lakh | Nil up to Rs. 7 lakh but 5% above the Rs. 7 lakh |
| Overseas Tour Package | 5% without any threshold limit | 5% till Rs. 7 lakh and 20% beyond that |
| Any other purposes under LRS | 5% of the amount or the aggregate of the amount exceeds Rs. 7 lakh | Nil up to Rs. 7 lakh and 20% if it goes above Rs.7 lakh |
So, this is the new structure of the scheme that all taxpayers must know about. However, one needs to appreciate the fact that the TCS at the rate of 20% is not a new tax. To explain, in Form 26AS, TCS is shown as a tax credit, which you can claim against the tax payable while you file for income tax refund.
How to get tax benefits from tax remittance under LRS?
It should be understood that the 20% of tax collected in TCS on foreign schemes upfront is not an additional tax on the existing income tax rate. It is more like a prepaid condition than tax which can be adjusted or reclaimed at the time of filing the income tax return (ITR). So, you can get tax benefits on tax remitted under the Liberalised Remittance Scheme.
Here’s how you can benefit from the TCS mechanism:
Claim credit for TCS: The TCS collected by banks or financial institutions is deposited with the government and even shown in your Form 26AS which is an annual tax statement that shows tax deducted and paid by the banks on your behalf. This TCS can be credited when you are filing your income tax returns, thus lowering the amount of tax you pay.
Refund of the excess TCS: Where the aggregate of the tax paid, including TCS, is higher than your actual tax incidence, you can claim for a refund. This applies if your total tax obligation is less than the TCS collected from your sub-contractors.
TCS for lower-income individuals: While the initial 20% TCS may sound big for individuals in the lower tax slab, but one should not worry as in reality the same amount is already deducted from the total taxes to be paid and is already credited to the person in advance.
TCS as a tool for cash management flow: When making your remittances, you can better manage the cash flow. For example, if you anticipate getting a tax refund for the TCS, then this money you can use to fund expenses such as foreign education, investment, or travel.
Reduce TCS liability by splitting transactions: You may also wish to spread the TCS on foreign remittance across financial years or create split accounts for the international sender and the receiver to minimize the overall TCS in a similar manner.
How to adjust TCS in IT filings?
As TCS is an advance tax, it has to be accounted for in your ITR or income tax return. So, it is always better to adjust the TCS on foreign remittances in IT fillings. Here is a step-by-step guide on how you can adjust the TCS you paid on foreign remittance transactions:
● Verify TCS in Form 26AS
The first step to adjust TCS in IT fillings is to confirm correctness of the total income tax (TCS) on your foreign remittances in Form 26AS. The form offers a convenient summary of the tax that has been collected and paid by banks/other financial institutions on behalf of the taxpayers.
● Filing your ITR
TCS is deducted at the time of making the overseas payment. In other words, the remitting entity deducts TCS before the money is transferred overseas. However, you can offset this advance tax while filing your IT returns.
● Claiming a refund
If the total TCS paid exceeds your tax liability, there is a possibility of a refund of the excess amount. The refund mechanism is rather simple, and the extra amount of tax that has been levied will be credited back to your bank account while assessing your ITR.
● Impact on high net-worth individuals (HNIs)
In particular, the TCS may put pressure on liquidity, as the tax is collected at the time of large remittances, whether for investment or luxury travel, typical of HNIs. However, such individuals can raise tax credits or refunds depending on the tax the individual pays.
In short, a 20% TCS on foreign remittance under LRS can be used to offset any other tax you will have incurred. Notably, you can reasonably use the tax credit collected or request a refund. Knowing how TCS should be included in your tax returns will help you avoid complications later.
Conclusion
The introduction of a 20% TCS on foreign remittance under the Liberalised Remittance Scheme has implications on how money is transferred overseas from India. However, this measure was intended to facilitate tax compliance and monitoring of international remittances.
Basically, it is an extra tax that one pays in advance. It means that anyone who pays taxes can manage their remittances under the LRS in such a way that they are not overburdened by this regulation. It would be prudent for the taxpayers, especially those who frequently remit huge amounts abroad, to understand how this change is going to affect them.
