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      Foreign Remittance – New Tax Collected at Source(TCS) Law

      • 5 min read
      • Last Modified Date: April 30, 2024
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      According to the union finance bill, 2020, remittances equal to or more than 7 lakh will be attracting tax collected at the source of 5% under the Liberalized Remittance Scheme. The implication of the Foreign Remittance tax rule, which was supposed to be effective from April 1, 2020, is postponed to October 1, 2020.

      Indian citizens are allowed to remit particular sums of money to foreign for investments and other expenses during the financial year, under the Liberalised Remittance Scheme of the Reserve Bank.

      New amendments to the Finance Bill, 2020 have been introduced, which is good news for investors who put their money in global stock markets. A new provision under the Liberalised Remittance Scheme (LRS) will go into effect on October 1, 2020, and it will levy a TCS (Tax Collected at Source) of 5%. This would apply to incoming fund transfers to your international investment account, and the rate would be levied on remittances exceeding $7 lakh in a fiscal year. According to the most recent amendment, all individuals remitting funds via LRS will be required to pay the tax collected at the source for medical treatment, gifts, maintenance of relatives abroad, foreign education, and investment in real estate, stocks, and bonds. The guidelines of RBI suggested that under the Liberalised Remittances Scheme, an individual is permitted to remit up to $2.5lakh abroad, effective from this financial year 2020. The remittable amount is equal to Rs 1.9 crore at an exchange rate of Rs. 76, which could be used for medical or educational expenses, and for buying property or investing in shares.

      They will, however, be able to offset these expenditures against their tax liability when filing their income tax. TCS, like tax deducted at source (TDS), can be claimed back in full or in part as a refund when filing an income tax return if the total income is less than the tax threshold limit for the year. It can also be deducted from an individual’s total income tax liability.

      What exactly is the Foreign Remittance New Tax Rule?

      The remittance to foreign exceeding the limit of 7 lakh will be attracting tax on it. The attracted tax will be 5% if you have PAN or Aadhar and 10% if you don’t, in this financial year. The tax payable must be paid before remitting the money to the concerned bank, or the authorized financial institution remitting your money. LSR transactions like loading of forex cards or foreign exchange by withdrawing cash exceeding the limit of 7 lakh, will also be charged a TCS of 5%.

      How exactly does it work?

      The TCS will be collected by a dealer (usually a bank) when the amount for remittance is received or when the amount payable is debited, whichever comes first. TCS will apply only to amounts exceeding Rs. 7 lakh in a fiscal year, rather than the total amount. For example, if you remit Rs. 12 lakh, TCS will be levied on only Rs. 5 lakh and the tax collected at source will be Rs. 25,000. To send Rs. 12 lakh outside India, you must pay Rs. 12, 25,000 (Rs. 12 lakh + 5% of Rs. 5 lakh).

      Surcharge and Health & Education Cess will be added to the TCS if the buyer is an NRI (Non-Resident Indian) or a foreign company.

      Example

      If you remit an amount of 20 lakhs abroad, exceeding the LSR limit of 7 lakh, the TCS tax rate will be 5 %. The tax will be applicable on the amount above seven lakhs only, i.e., 20 – 7 = 13 lakhs. 5% on 13 lakhs will be 65,000, which will be collected at the source of remittance.

      If the amount to be remitted is for educational purposes and is obtained by taking a loan, the TCS rate applicable is not 5% but 0.5%. For the above instance, if the remittance is for educational purposes, the TCS that needs to pay is 0.5% on 13 lakhs, i.e., 6500

      What are the rates of TCS on Foreign Remittance?

      • TCS of 5% on foreign remittances
      • TCS of 0.5 percent on foreign remittances for education
      • If the buyer does not provide a PAN number, a 10% TCS will be levied.
      • In the case of an NRI or a foreign company, a surcharge and a health and education cess will be levied.

      Is there any wiggle room?

      Remittances of less than Rs. 7 lakh are exempt from this TCS. Payments for foreign education originating from an education loan from an Indian financial institution are subject to a lower 0.5 percent TCS. You will not be subject to the TCS if you book your foreign tour yourself (tickets, hotels, etc.) rather than through a packaged tour operator. TCS will also not apply if the buyer of the foreign exchange (the remitter) is subject to TDS under the Income Tax Act of 1961. For example, if you transfer money in excess of 50,000 to a non-relative NRI as a gift, you must deduct TDS rather than TCS. TDS does not apply to some gifts, such as those between parents and children, so TCS will apply.

      Key Highlights of the Foreign Remittance Tax Change

      • TCS implementation will be effective from October 1, 2020, instead of April 1, 2020.
      • TCS amount paid is a tax credit and can be filed for a tax return to get a refund or can be adjusted against the tax payable.
      • If NRI remits the amount, an increased surcharge, health, and education cess along with the TCS tax are applicable.
      • These tax reforms are made to ensure the amount transferred abroad doesn’t escape paying Income tax.
      • TCS applies to foreign travel as well and is deducted by the tour operator. TCS is calculated, including all the expenses like food, accommodation, and travel costs.
      • TCS is not applicable if the remitter has already been deducted with a tax on the amount. GST is also not applicable to the TCS Amount.

      Impact of the Amendment

      Implementation of the amended TCS increases the paperwork, and the procedure will be prolonged to the financial institutions. The process of purchasing foreign currency for emergencies or any other purposes will become more complicated. The TCS return filing every quarterly will be an additional burden. The transactions of the NRI’s of foreign remittance will not be accounted under LRS, and the TCS applicable will differ. Disparities may occur between the bank and the customers who have availed for student loans for studying abroad, and only 95% be paid towards and the other 5% for TCS.

      This is an excellent initiative started by the government to ensure law compliance of foreign remittances. An internal survey by the income tax department revealed that a large number of people remitting money abroad had not filed income tax returns. These measures are taken by the government, ensuring no individual uses foreign remittance to escape paying Income tax. 

      Tax amendments in the Union bill related to foreign remittances have bought clarity to the taxpayers, and for the government, these will help by increasing the accountability of taxpayers.

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      Foreign Remittance FAQs:

      The remittable amount abroad for this financial year is $2.5 lakh and TCS of 5% will be applicable from remittances exceeding 7,00,000 rupees.

      Under the Liberalized Remittance scheme RBI allows the citizens of India to remit a certain amount of money every financial year for investment and other expenses.

      For the financial year 2020 the remittable amount abroad is $2.5lakh that is equal to Rs 1.9 crore at an exchange rate of Rs. 76.

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