Understanding TCS on Foreign Remittance

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Key Takeaways

In this article, we try and answer your questions about foreign remittance taxation, how it works and the rules that govern it.

Introduction

Do you wish to send money to your child studying overseas? Is there a family member settled in another country who may be in need of financial assistance? Then you may need to send money under the Liberalised Remittance Scheme (LRS) introduced by the Reserve Bank of India (RBI). This money comes under the ambit of foreign remittances and is subject to tax collected at source (TCS).

What is TCS on Foreign Remittance?

Starting October 1, 2020, a tax collected at source (TCS) deduction on foreign remittances made via the Liberalised Remittance Scheme (LRS) route was introduced. Under the LRS, all resident Indians, including minors, can conduct any such financial transactions involving sending money outside the country under LRS. The same is also levied in the case of foreign travel or tour packages booked from India. There are certain specified limits for foreign remittances under the Income Tax Act, beyond which any money transfer is taxable at a pre-decided TCS rate. But just like input tax credit in the case of goods and services tax (GST), you can also claim credit for TCS at the time of income tax return filing.

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A point to note here is that the scheme is not available to partnership firms, corporates, Hindu undivided families (HUFs), Trusts, etc.

How does TCS on Foreign Remittance work?

There is a minimum exemption amount up to which foreign remittances via the LRS scheme are permitted without any tax liability. However, beyond the said amount transferred in remittances in one financial year, any more funds sent outside the country under LRS are subject to a TCS deduction.

A person can transfer up to USD 250,000 in a single financial year in foreign remittances under the LRS of the RBI. This limit includes transfers under both capital and current account transactions, i.e., money transfer for a personal trip, gifts or donations, overseas travel for employment, medical costs and business trips, foreign education or amounts sent to relatives settled abroad. If money beyond this amount has to be remitted outside India, you required to have prior permission from the RBI.

The money paid in taxes under the new TCS rules can be adjusted against your overall tax liability. It can be claimed as an income tax refund or a credit can be availed at the time of return filing. A TCS certificate is provided by the dealer at the time of deduction, which can then be used to claim TCS in your ITR filing.

At what rate is TCS on Foreign Remittances levied?

Under the existing Income Tax rules, rates for TCS collection on foreign remittance under the LRS have been outlined. An amount sent overseas for any purpose under the scheme is subject to a TCS deduction at the rate of 5% (if a buyer produces a PAN card), or else the same is taxed at the rate of 10%. But in the case of any money being remitted towards repayment of loan taken from a bank for the purpose of funding education, tax is collected at source on the same at a rate of 0.5%. Again, if the said person is unable to furnish his or her PAN card, the TCS rate levied on the transaction is then 5%.

Then there is the case of the sale of overseas tour packages, where the buyer is taxed at 5% at source (when PAN is furnished), or at 10% (where PAN is not furnished). Unlike under the LRS, there is no minimum exemption limit on the amount in the case of a tour package sale.

Final Note

Taxation at the source of the income is a means of safeguarding potential taxes that may be due to the government. While the process may seem laborious, there is merit to it. If tax has been collected and there was a legitimate exemption available, the entire amount, or parts of it can be easily claimed as a refund.

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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.