The Finance Act 2020 has introduced new provisions for collecting tax at source (TCS) on foreign remittances that are in effect from October 1, 2020. Foreign remittance means outward remittances or money that is going out of India. The new tax is not applicable to inward remittances. For instance, if you are sending money from the United States to India, the new tax is not applicable.
A 5% TCS has been imposed on all foreign tour packages and other foreign remittances done under the Liberalized Remittance Scheme (LRS) that exceeds Rs 7 lakh in a financial year. However, the TCS will be 0.5% only if the amount exceeds Rs 7 lakh in case of remittances funded by loans for the pursuit of education abroad.
The imposed TCS will not be applicable if the tax is already deducted at the source (TDS) on the amount.
How Will the New TCS on Foreign Remittances Work?
Under the LRS of the Reserve Bank of India, resident individuals are allowed to remit a maximum of $250,000 abroad in a financial year for various purposes like medical expenses, gifts, donations, overseas education, purchasing items on international e-commerce websites, investment in property or international stocks, etc. The new TCS provisions are applicable to such foreign remittances.
The threshold amount of Rs 7 lakh is kept for the collection of tax. The 5% TCS is on the amount over Rs 7 lakh in a financial year and not on the total amount. No such threshold amount exists in case of remittances made for the purpose of buying overseas tour packages and the 5% tax will be collected on the total amount. However, if you didn’t purchase the foreign tour packages from a tour operator and made the travel arrangements on your own, the TCS is not applicable.
Keep in mind that the tax deducted will be 10% in case of failing to provide a PAN card while making the remittance.
Let’s say you remitted Rs 10 lakh in a year under the LRS. The 5% will be calculated on Rs 3 lakh (Rs 10 lakh minus Rs 7 lakh). So, Rs 15,000 will be deducted as TCS. In case you remit Rs 10 lakh for the purchase of an overseas tour package, the 5% tax will be collected on the entire Rs 10 lakh, i.e. Rs 50,000 will be deducted.
The rate of the TCS is just 0.5% on the amount exceeding Rs 7 lakh for students studying abroad if the remitted funds are obtained from an education loan as per the Section 80E of the Indian Income Tax Act. The tax rate will go up to 5% if the PAN card is not provided.
TCS is to be collected by the authorized dealer or banks or the seller of the package. It shall be collected either at the time of receiving the amount or at the time of payment whichever is earlier. If the buyer is a Non-Resident individual or a foreign entity, the rate will further increase by Surcharge and Health & Education Cess.
When it comes to sending remittances as gifts to NRI, according to the taxation rules on gifts since July 2019, TDS is applicable if the value of the gifts exceeds Rs 50,000 in a financial year. NRIs will need to disclose such gifts and pay the tax as per the tax rules. The new TCS rules will apply on gifts to NRIs if it exceeds Rs 7 lakh.
Ways to Get Your TCS Money Back
The new TCS rule is not an additional tax liability. You can do one of the two ways to get your money back. One way is to claim the money as an income tax refund. You will be able to get the credit for the 5% TCS and it will be reflected in your Form 26AS. You will have to wait for the tax filing period to claim the refund. Check if the TCS credit is deposited to your account through the income tax website.
The other way is to adjust it against your other tax liabilities.
The TCS certificate can be obtained from the authorized dealer and claim the TCS collected in the ITR. In the absence of no tax liability, you will get a refund on the amount.
Impact of the New TCS Rules
The TCS rules will increase the upfront cost of overseas education and international travel, although you can get a refund when filing your income tax return. It will impact Indian students going abroad for education, Indian visiting foreign destinations, and Indian investors investing in international stocks or property.
The tax levied on the foreign remittance will reduce the disposable income and moreover, if one is to get a refund if they have a low tax liability, they will have to wait for a year or more.
Foreign tour & travel agents could lose business if people start self-bookings to avoid paying TCS on buying overseas tour packages.
These new provisions have been implemented to prevent tax evasions and to encourage people to file income tax returns.
To have a better understanding of the money transactions in the Indian economy, the Indian government has been extending the scope of both tax-deducted at source and tax-collected-at source while encouraging the use of electronic payments.