Starting October 1, 2023, significant changes are set to roll out in the relation to tax collection at source (TCS) in India. These modifications will have an impact on various financial transactions, especially those involving overseas expenses. Whether you’re planning international travel, investing in foreign assets, or financing higher education abroad, these new TCS rules demand your attention.
The new rule
Under the Liberalised Remittance Scheme (LRS) by the Reserve Bank of India (RBI), individuals can send up to $250,000 abroad annually. Beginning October 1, 2023, any remittance exceeding Rs 7 lakh for purposes other than medical and educational will incur a TCS of 20 percent.
Different TCS rates will apply for the first and second halves of the financial year, but the Rs 7 lakh threshold will apply for the entire year.
For those seeking medical treatment abroad, a 5 percent TCS will be applicable if the amount crosses Rs 7 lakh.
Purchasing overseas tour packages, even below Rs 7 lakh, will now incur a 5 percent TCS starting from October 1, 2023. For packages exceeding Rs 7 lakh, the TCS rate will be 20 percent.
Investing more than Rs 7 lakh in foreign stocks, mutual funds, cryptocurrencies, or property during a financial year will trigger a 20 percent TCS. However, domestic mutual funds with foreign stock exposure are exempt.
Credit card transactions will be exempt from TCS. On the other hand, debit and forex card transactions will be subject to TCS if the spending exceeds Rs 7 lakh, with a 20 percent rate from October 1, 2023.
If someone utilises multiple banks or dealers for remittances within a year, the Rs 7 lakh threshold will apply to the total amount spent across all sources, rather than individually for each source.
When sending money abroad for education, no TCS will apply on remittances below Rs 7 lakh. If it exceeds Rs 7 lakh and is financed through an approved financial institution’s loan, a 0.5 percent TCS will be applicable. Without a loan, it incurs a 5 percent TCS.
Geeta Chauhan, Co-Founder & CEO, HiWi, a fintech firm, emphasised that expenses related to international education, including airfare, tuition, and daily living costs, are eligible as educational expenses under the TCS regime. However, this classification depends on providing evidence of the expenditure’s educational purpose.
“The new rule will not have much impact on remittances for foreign education. If the money sent for foreign education crosses the threshold of Rs 7 lakh which is financed by a loan, it will attract a TCS of 0.05 percent, which remains the same as per the current rule. Whereas, for remittances beyond the threshold limit, not obtained through a loan will attract TCS of 5 percent and not 20 percent as applicable for other expenses. In case parents wish to remit money beyond the threshold limit, they will have to take permission from RBI,” Chauhan said.
She illustrated this with an example.
Imagine the college fee for education abroad is Rs 25 lakh, and the source of funding isn’t a loan. In such a scenario, a TCS of 5 percent is applied to the amount exceeding Rs 7 lakh, which calculates to Rs 18 lakh (Rs 25 lakh-Rs 7 lakh), resulting in a TCS of Rs 90,000. Now, when you file your income tax return, you realise that your tax liability amounts to Rs 2,90,000. In this situation, you have the option to offset your tax liability by the amount of TCS paid. This adjustment will reduce your net tax liability to Rs 2 lakh (Rs 2,90,000 -Rs 90,000),” she said.
Typically, banks furnish a TCS certificate upon deduction. Individuals can utilise this certificate either to lower the tax liability or to claim a refund if the tax liability is less than the TCS amount deducted. Alternatively, they can seek assistance from the accountant to retrieve the necessary details from the income tax website.
Earlier and new TCS rates are summarised as under:
(Source: Ministry of Finance)
How to receive a TCS refund?
Vinay Bagri, Co-Founder and CEO, Niyo, emphasised that TCS is not an additional tax but rather an advance payment toward the overall tax liability.
It can be offset against taxes payable during income tax filing or advance tax payments. If not offset, it can be claimed as a refund when filing income tax returns (ITRs). However, experts say that this may result in cash flow issues for some taxpayers. The fund will be locked until the time the refund is done after processing of ITR. Additionally, experts point out that those not having an income, and so not within the taxable threshold, will not get the refund either.