Budget 2020 introduced the provision for tax collected at source (TCS) at the rate of 5% on all remittances above ₹7 lakh under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI), which will be effective 1 October 2020. Payments for foreign tour packages will also be subjected to 5% TCS, without any exemption threshold. The move is aimed at reducing possible tax evasion and stem the flow of capital and consumer spending outside India.
Indian residents can remit up to $250,000 under LRS every year for various purposes such as medical treatment, buying gifts, maintenance of relatives abroad, foreign education and investment in real estate, stocks and bonds.
However, like tax deducted at source (TDS), the tax paid under TCS can be claimed back, fully or partially, as a refund while filing income tax return if the total income is below the tax threshold limit for the year. Or, it can be adjusted with your overall income tax liability.
The authorized dealer of the foreign exchange in question, typically the bank remitting the money for fees, investments or other purposes, will collect the tax and pay it to the government. In case of a foreign tour, the travel operator is required to collect TCS.
If you do not provide your permanent account number (PAN) or Aadhaar to the authorized dealer of foreign exchange, TCS will be deducted at 10%. “TCS will apply on the amount remitted in excess of ₹7 lakh. For example, if you transfer ₹10 lakh, it will apply on the balance ₹3 lakh,” said Prakash Hegde, a Bengaluru-based chartered accountant.
Remittances below ₹7 lakh are not subject to this TCS. Similarly, payments for foreign education made through an education loan from a financial institution in India are subject to a lower 0.5% TCS.
If you book your foreign tour yourself (tickets or hotels) rather than going through a packaged tour operator, you will not be subject to TCS. It will also not apply if the buyer of the foreign exchange (the remitter) is subject to TDS under the Income-tax Act, 1961.
“For example, if you are transferring money exceeding ₹50,000 to a non-relative NRI (non-resident Indian) as gift, you will be liable to deduct TDS on the remittance and not TCS. In some gifts, such as between parents and children, TDS does not apply and hence TCS will apply,” said Hegde.
If you have already transferred some amount outside India in FY21 before October, the transfer will be counted in the overall limit of ₹7 lakh, he added. For example, if you transferred ₹10 lakh on 1 June and you again transfer ₹5 lakh on 1 November, the fresh transfer will be entirely subject to TCS even though it is less than ₹7 lakh. This is because the previous transfer counts against the ₹7 lakh limit, which is per financial year.
What it means?
Experts said investors should not be alarmed since TCS can be adjusted against the overall tax liability. “The majority of investors who invest in foreign stocks online most likely file taxes already, so this is just a prepayment of your tax and not a new tax burden,” said Gaurav Rastogi, chief executive officer of Kuvera, a fintech platform.
For example, assume that you are liable to pay tax of ₹15 lakh on your annual income of ₹50 lakh and you have transferred ₹20 lakh outside India to invest in US stocks. In this case, TCS would be ₹65,000 (5% of ₹13 lakh ( ₹20 lakh – ₹7 lakh). This ₹65,000 will get reduced from your tax liability of ₹15 lakh.
To avoid TCS, you may want to limit your foreign spending to ₹7 lakh per year. This can, however, increase the cost of foreign exchange purchases because banks impose higher charges on small amounts of forex transactions.
Sitashwa Srivastava, founder of Stockal, a fintech platform focusing on international investing for Indians, recommended a few strategies to reduce the cost of forex conversion. “Leverage your relationship with the bank to get a better forex rate than the card rate. Even for transfers of $8,000-10,000, there is room for negotiation. Alternatively, if you are transferring for investment, some fintech platforms have negotiated favourable exchange rates for their customers. Investing through them might be cheaper,” he said.
Investors should not let TCS affect their foreign investments or education goals as the tax can be set off against the overall tax liability and a refund can be claimed if excess tax is deducted.