New tax rule (TCS) explained: Foreign transactions under LRS

Finance Minister Nirmala Sitharaman’s proposed Union Budget for 2023 included some significant updates related to foreign remittance. The RBI’s Liberalized Remittance Scheme (LRS) allows people in India to send money abroad for education, medical treatment, business, and other purposes. In Budget 2023, major changes have been proposed to the TCS structure on Foreign Remittance Transactions under LRS. There is a lot of confusion surrounding this new tax rule, but we are here to clarify everything for you.

For foreign outward remittances under LRS (other than for education and medical purposes), the Union Budget 2023 proposes a Tax Collection at Source (TCS) of 20%, starting July 1, 2023. Prior to this proposal, a TCS of 5% was applied to outward foreign remittances over a threshold of INR 7 lakhs. 

Starting July 1st, 2023, the new TCS will be in effect. Does this mean that medical and education remittances are not subject to TCS? Well, taxes will still be imposed, but the proposed tax rate has not changed for these two purposes. For education and medical treatment, a TCS of 5% will be applied, and 0.5% for remittance related to education abroad, only when the source of funds has come through a loan from a financial institution. You can check the present TCS rate and proposed TCS rate in the table below:

Please note that TCS is not an additional charge and can be adjusted against your total income tax liability & claimed while filing tax returns. One can also claim a refund if the remittance is from an income that is already tax-deducted at source (TDS).

What Is the Liberalized Remittance Scheme (LRS)?

A resident individual can transfer money abroad to the limit of USD 2,50,000 per financial year. It falls under the LRS which is created by the Reserve Bank of India. This LRS limit can be carried out as a one-time transaction or through multiple transactions.

Examples Of TCS Application On Foreign Remittance Through Liberalised Remittance Scheme (LRS)

Here we take a few examples to explain to you the tax implications on foreign remittance.

Case 1: 

Let’s assume someone made the remittance for the tour package & purchased a Rs 6 lac tour package during a financial year.

In this case, regardless of the amount of the tour package that you purchase, you will be charged a 20% TCS as per the new proposed rate, starting July 1, 2023. So, you are liable to pay {(6,00,000)*(20/100)}=Rs 1,20,000 as TCS. Prior to this proposal, remittances for overseas tour packages were subject to a TCS of 5%.

Case 2:

Consider that someone wants to remit Rs. 8,00,000 as education fees. For remittances made for education, the proposed TCS rate remains unchanged. In this case, a person will be charged a TCS of 5% of the amount or the aggregate amount over Rs. 7 lakhs. So, the amount of TCS in this case will be {(8,00,000-7,00,000)*5/100}=Rs 5000.

Now let’s assume that someone has taken an education loan of Rs. 8,00,000 from a Financial institution and wants to remit these funds for an education Fee. In this case, that person will be charged 0.5% of the amount or the aggregate amount over Rs. 7 lakhs. The amount of TCS to be paid is {(8,00,000-7,00,000)*0.5/100}= Rs 500.

Case 3

Let’s assume that someone remitted Rs. 15,00,000 in April 2023, will he be liable to pay 20% TCS?

Well, no, this rule only applies to the remittances made on after July 1, 2023 and hence, the old TCS rate will apply in this case.

Also Read: New TCS on Foreign Travel: What You Need to Know

Can you get the TCS money back?

Yes, most certainly. This tax is just like TDS (Tax deducted at source) that is cut on your salary for which you can claim a tax refund while filing the income tax return. It will be reflected in your Form 26AS.

Checkout how BookMyForex can help you adjust TCS

Frequently Asked Questions (FAQs)

Q1. What is the effective date of implementation of the new proposed Tax Collected at Source (TCS)?

A: From July 1, 2023, 20% Tax Collected at Source (TCS) provision on all forex transactions & outward remittances will be implemented.

Q2. What transactions will be impacted by this new TCS provision?

A: All forex transactions and/or remittances (other than for education and medical purposes) in a financial year done under the LRS will now be liable for 20% TCS. The TCS on remittance for education and medical treatment is still the same i.e. 5%, and 0.5% for remittances, where funds for education have come from a loan. Forex transactions done for business/corporate travel do not fall under the LRS and will not be subject to any tax collected at source (TCS).

Q3. Will GST be applied to the Tax collected at source (TCS)?

A: No, GST will not be applied to the tax collected at source (TCS). The amount debited from the buyer’s account or received by the seller shall be inclusive of VAT/excise/GST. As a result, the TCS should be inclusive of GST.

Q4. What are the different remittance purposes for which TCS is applicable?

A: The TCS will apply to all remittance(s) out of India that fall under the Liberalized Remittance Scheme (LRS) of RBI. Funds can be transferred for a variety of purposes such as tuition fees for university, medical expenses for a family member, living expenses of a close relative, sending money abroad to friends living there, etc. It is only the TCS rate that differs based on the purpose.

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