New tax rule on foreign transactions
October 1, 2020
7 minutes, 55 seconds Read

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

New tax rule on foreign transactions

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A new tax rule on remittances has come into the application from today onwards. There is a lot of confusion around the new tax rule, however, you do not need to worry about anything. We have got all your questions covered.  According to the new rule, a 5% TCS (Tax collected at source) will be applicable on all remittances crossing INR 7 lakh under RBI’s Liberalized Remittance Scheme (LRS). The TCS on forex transactions will be effective from today itself (October 1).

For remittances that carry the purpose of overseas education, TCS will apply at a rate of 0.5%, only in the case if the amount remitted is originating through a loan from a financial institution. If you are doing payments for your foreign tour packages, that payment will also draw a 5% TCS. There’s some good news for NRIs (Non-resident Indians) as this new 5% TCS rule will not be applicable when they do their transactions. This is only applicable to the resident Indians.

One of the main things to note here is that TCS (Tax collected at source) will apply only to the amount over INR 7 lakh in a fiscal year and not on the total amount. For example, if you transfer INR 9 lakh in a financial year, TCS will apply to the extra INR 2 lakh at a rate of 5%, and hence it will draw a tax of INR 10,000.

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 has made the following remittances during FY 2020-21:

Transaction 1 – Rs. 5,00,000

Transaction 2 – Rs 8,00,000

Transaction 3 – Rs 1,50,000

TCS applicability transaction wise is as under:

TransactionTCS Applicability
Transaction 1 – Rs. 5,00,000No Tax will be collected since the amount is below Rs 7,00,000/-
Transaction 2 – Rs 8,00,000TCS will be applicable on Rs 6,00,000
[(Rs 5,00,000 + Rs 8,00,000 = Rs 13,00,000) – Rs 7,00,000 = Rs 6,00,000]
Transaction 3 – Rs 1,50,000TCS will be applicable on Rs 1,50,000 entirely since Rs 7,00,000 limit has been exceeded in transaction 2 only.

Case 2

Now let’s assume that someone has taken an education loan of Rs. 8,00,000 from a Financial institution and wants to remit funds for education Fee of Rs. 15,00,000

TCS application as per the amendments will be as below:

0.5% TCS on Rs. 1,00,000
5% TCS on Rs. 7,00,000

Case 3

Let’s assume that someone remitted Rs. 15,00,000 in July 2020, will he be liable to pay TCS?

Well, no, this rule only applies to the remittances made on after Oct 1, 2020, and on the aggregate amount in the FY in excess to Rs. 7,00,000.

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.

Frequently Asked Questions (FAQs)

Part 1

Q1. What is the effective date of implementation of the tax implication?

A: The implementation of TCS provision on foreign remittance is revised from 1 April 2020 to 1 October 2020

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

A: All remittances more than INR 7 lakh in a financial year done under the LRS will be liable for a 5% TCS except if the remittance is for education which is paid through a loan received from any bank or approved financial institution by the RBI. The rate will then be reduced from 5% to 0.5%.

The exemption from TCS on remittance overseas under LRS for amounts less than INR 7 lakh in a financial year will not be applicable if the amount is being remitted for the purchase of an overseas tour program package.

Q3. Will GST be applied to the 5% Tax collected at source (TCS)?

A: No GST will be applied on the tax collected at source (TCS). Though, GST will be charged on when you convert the currency and use a remittance service for its usage.

Q4. What are the different purposes on which the tax collection is applicable?

A: The tax will be applicable to all remittance(s) out of India that fall under the Liberalized Remittance Scheme (LRS) of RBI.

Q5. What Tax will be applied in the case of Non-PAN transactions?

A: TCS for Non-PAN transactions will be 10% although no LRS transaction is possible without PAN.

Part 2

Q6. Whether TCS on foreign remittance through Liberalised Remittance Scheme (LRS) will be applicable on the entire amount of remittance or only on an excess of Rs 7 Lacs?

A: TCS shall be applicable on amount in excess of ₹ 7 lakhs in a financial year and not on the total amount.

Q7. What if the customer bought forex of Rs. 10,00,000, paid TCS and then encashed Rs. 5,00,000. Will the TCS be refunded back or will apply again?

A: No, TCS once paid can only be claimed at the time of IT returns if the cumulative Tax is lesser than what is already paid. Also, no TCS will be applied for encashments/Unload orders.

Q8. What if a customer bought a tour worth of Rs. 6,00,000 and now wants to remit forex worth of Rs. 2,00,000, what will be the TCS?

A: There will not be any TCS applied on the forex as the availed forex limit within FY is under Rs. 7,00,000.

Part 3

Q9. When a Resident Indian transfers to NRO Account towards Gift/Loan under LRS, will TCS be applicable?

A: There will not be any TCS applied on such transfers until it does not cross the limit Rs. 7,00,000 in a financial year.

Q10. What is the new tax implication on remittances for pursuing overseas education?

A: For remittances that carry the purpose of overseas education, TCS will apply at a rate of 0.5%, only in the case if the amount remitted is originating through a loan from a financial institution.

For example, let’s say that the total amount is INR 12 lacs. TCS at 0.5% will be applicable on Rs. 5,00,000 (Amount after Rs. 7 lac is taken into account) & tax collected in this case will be Rs. 2,500.

Q11. What is the tax implication if the amount remitted for pursuing overseas education is through own savings and not through a loan?

A: A 5% TCS will be applied on remittances crossing INR 7 lakhs in a financial year under LRS.

Q12. What is the tax implication for remittances to Foreign Tour Operator under LRS?

A: TCS at 5% will be applicable once the amount crosses the Rs. 7,00,000 limit in a financial year.

For example, if the amount remitted is INR 6,00,000, TCS at 5% will be applicable and tax collected will be INR 30,000.

Part 4

Q13. Will TCS (Tax Collected at Source) be applicable if foreign exchange facility is availed in Cash or Forex cards?

A: Yes, it will be applicable. TCS at 5% will be applicable when foreign exchange currency is obtained while withdrawing the cash at branches or when you reload your forex card.

Foreign Exchange facility availed through FCY Cash or Forex cards towards Overseas Education out of a loan from a Financial Institution attracts TCS @ 0.5% on drawl exceeding INR 7 lakhs in a Financial Year under LRS (TCS @ 5% shall be applicable in case amount drawn is not obtained out of loan from a Financial Institution).

FCY Cash or  Forex Cards availed towards Overseas or Foreign tour programme, will attract TCS @ 5% and the amount drawn shall not be included under the aggregate threshold limit of INR 7 lakhs.

Q14. In case of minor accounts, the threshold limit (INR 7 lakhs) of the minor or guardian will be utilized?

A: If the PAN updated on the account is of the Minor, the threshold limit of the Minor will be utilized. In case if the PAN of guardian is there on that particular account, the guardian’s financial year limit of Rs. 7 lakhs will be used. As a result, TCS will also be collected in the guardian’s name.

How To Save Money On Your Foreign Money Transfers From India?

After the new 5% TCS rule on remittances, it becomes even more important to cut the costs. Even though you can claim for tax refund when you pay but it’s important to save money while you do your foreign money transfers from India. Saving every little bit of it helps and you can process all your international transactions using BookMyForex which is the world’s first and largest online foreign exchange marketplace. You are guaranteed to get the best exchange rates possible on your international money transfers. We compare rates across hundreds of banks and money changers and provide you the best possible rate.

In case you have any queries regarding anything, feel free to drop us an email at support@bookmyforex.com. We will be happy to help you!

References:

http://egazette.nic.in/WriteReadData/2020/218938.pdf

Manik Varshney

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