In the Union Budget 2023, Nirmala Sitharaman, the Finance Minister of India proposed a few changes to the Tax Collected at Source (TCS) rates which will affect forex transactions and outward remittances made under Liberalized Remittance Scheme (LRS) from July 1st, 2023.
Let us understand the term Forex transactions and LRS first.
What are Forex Transactions?
Forex transactions are converting the Indian rupee to foreign currency and transferring or remitting outside India for any personal or business purpose or for both.
What is Liberalized Remittance Scheme?
Under the LRS scheme, a resident individual can remit funds outside India up to $ 2,50,000 or its equivalent in any freely convertible foreign currency without obtaining any prior permission from the Reserve Bank of India for a particular financial year for any permissible capital or current account transaction or a combination of both. The Scheme is not applicable to Corporates, Partnership firms, HUF, Trusts, etc. In case if the remittance is made by the minor, then the LRS declaration form must be countersigned by the Minor’s natural guardian.
Some of the permissible capital account transactions under LRS are:
- Purchasing of property abroad
- Opening foreign currency account outside India with a bank and transferring money to that bank.
- Extending loans in INR to NRIs who are relatives as defined in the Companies Act, 2013
- Investing in shares, mutual funds, venture capital, debt instruments, etc.. abroad
- Setting up wholly owned subsidiaries (WOS) and Joint Venture (JV) abroad for bonafide business subject to stipulated terms and conditions
Some of the permissible current account transactions under LRS are:
- Private visit to any country other than Nepal & Bhutan
- Gift or Donation including rupee gift to Non-Resident Indian (NRI) / Person of Indian Origin (PIO), who is a close relative
- Emigration
- Overseas business trip
- Medical treatment abroad
- Pursuing studies outside India
- Going outside India for employment
- Maintenance of close relatives abroad
The Union Budget 2023 proposes a Tax Collection at Source (TCS) of 20% applicable from July 1, 2023 for foreign outward remittance under LRS other than for Education and medical purpose. Before this proposal, the TCS of 5% was applicable on foreign outward remittances above INR 7 lakhs.
What is Tax Collected at Source (TCS)?
Tax Collected at Source (TCS) is an income tax, collected by the seller of specified goods, from the buyer. The seller is liable to collect tax from a buyer at a specified rate and deposit the same with the Government. Currently, TCS is only applicable to foreign outward remittances when the Indian Rupee gets converted into any foreign currency and sent outside India. It is not applicable to foreign inward remittances i.e., money sent to India.
Changes in the TCS Rates on Forex Transactions;
| Type of Forex transactions | Current TCS Rate | Proposed TCS Rate |
| Foreign Remittances for overseas Education | 5% on the aggregate forex transactions exceeding ₹ 7 Lakhs in a FY. | No Change in the rates |
| Foreign Remittances for overseas Education (In case of Education loan) | 0.5% on the aggregate forex transactions exceeding ₹ 7 Lakhs in a FY | No Change in the rates |
| Foreign Remittances for Medical treatment abroad | 5% on the aggregate forex transactions exceeding ₹ 7 Lakhs in a FY | No Change in the rates |
| International tour packages | 5% without any threshold limit | 20% without any threshold limit |
| Any other foreign remittances / transactions | 5% on the aggregate forex transactions exceeding ₹ 7 Lakhs in a FY | 20% without any threshold limit |
Let’s have a look at a few examples to have a better understanding of the revised TCS rates:
Example 1: If you want to convert 3 lacs to US dollars for your overseas travel then the bank will deduct 20% TCS on 3 lacs without any threshold limit from July 1 st 2023.
TCS Deduction: 20% on 3,00,000 = 60,000
Example 2: If you are converting or remitting 12 lacs to US dollars for your kid’s overseas education expenses then the bank will deduct 5% TCS on the amount exceeding 7 lacs if it is your own funds.
TCS Deduction : 5% on 5,00,000 (12,00,000-7,00,000) = 25,000
In case the same funds are obtained through an education loan from a financial institution then the bank will deduct TCS of 0.5% on the amount exceeding 7 lacs.
TCS Deduction : 0.5% on 5,00,000 (12,00,000-7,00,000) = 2,500
The bank provides a TCS certificate at the time of deduction, which can be used for claiming TCS in your ITR filing.
The money deducted as TCS can be adjusted against your overall tax liability.TCS can be claimed as an income tax refund or a credit can be availed when filing the income tax return or for computing your advance taxes.
For Example, Mr Raghu remitted 2 lacs for his Foreign travel and 20% TCS will be deducted i.e., 40,000 (2,00,000 * 20%). As per the income tax act, Mr. Raghu can adjust the TCS against his advance taxes or the overall tax liability. At the time of income tax filing, he can claim a tax refund if the TCS deduction is more than his tax liability for that FY.
Let us say if the overall tax liability of Mr Raghu is Rs. 2,00,000 then Rs. 40,000 of TCS deduction is adjusted against the tax liability which therefore results in the net tax liability of Rs. 1,60,000 only.
On the other hand, if Mr. Raghu’s overall tax liability is only Rs. 20,000 then he claims the excess amount of TCS deduction i.e., Rs. 20,000 by filing income tax returns.
Bimal Jalan former Governor of the Reserve Bank of India concluded, “It is important to note that while TCS is merely advance collection of tax on a payment made, the purpose was to track whether people making high-value remittances reflected proportionately high income in their tax returns.”
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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Also Read: A guide to investing abroad through Liberalised Remittance Scheme (LRS)