Sending funds abroad? Be aware of the ‘tax collected at source’ rules
This tax was proposed in the Union Budget 2020 and will be applicable from October 1
Be ready to pay a 5 per cent tax (i.e., TCS: tax collected at source) on your remittances done under the LRS (Liberalised Remittance Scheme), if it crosses Rs 7 lakh in a financial year. This tax was proposed in the Union Budget 2020 and will be applicable from October 1.
Is it a newly introduced tax?
No, this is not an additional tax liability, so do not confuse this as a tax on transferring funds abroad. This tax is like TDS on your salary or other professional payments where you get credit for the taxes deducted. You will get credit for the 5 per cent TCS, and it will be reflected in your Form 26AS. You can either claim it as a tax refund while filing your tax returns or adjust it against your outstanding tax liability.
Transactions under LRS and applicability of the TCS:
Money can be remitted under the LRS option for several purposes.
- Medical treatment, donations, gifts, maintenance of a close relative
- Overseas education
- Foreign travel
- Investment, like property or international stocks
The 5 per cent TCS will be deducted for remittance amounts exceeding Rs 7 lakh. For example, if you are remitting Rs 12 lakh in a year, 5 per cent will be calculated on Rs 5 lakh (Rs 12 lakh - Rs 7 lakh). So, Rs 25,000 will be deducted as TCS.
An important point to note here is that this Rs 7 lakh exemption limit is applicable for the current financial year, i.e., April 1, 2020 till March 31, 2021, though the rule will be applicable from October 1, 2020. So, if you have remitted any money after March 2020, then that will be counted while calculating the Rs 7 lakh exemption limit. For example, if you transferred Rs 5 lakh before October and then made another transfer of Rs 8 lakh after October 2020, then this 5 per cent TCS will be calculated on Rs 13 lakh (total transfer value) minus Rs 7 lakh (exempted value) which comes to Rs 6 lakh. So, 5 per cent of Rs 6 lakh, i.e. Rs 30,000 will be charged as TCS.
In case your remittance before October 2020 was more than Rs 7 lakh, then there is no need to pay 5 per cent retrospectively. It is applicable for all transactions done on or after October 1, 2020. Transactions in the current financial year, that is, from March 2020 onward, will count toward this tax if remittances are made after October 2020, with the total exceeding the exemption limit.
Are TCS and the exemption limit applicable to all transactions uniformly?
Yes, the 5 per cent TCS and Rs 7 lakh exemption limit applies to most of the remittance transactions except in the following cases:
Overseas travel package: When you remit money for purchasing an overseas travel tour package, you would not get the exemption of Rs 7 lakh and have to pay TCS on the total amount of remittance. For example, if you pay Rs. 10 lakh towards an overseas travel package, then you need to pay 5 per cent TCS on the entire Rs 10 lakh.
Non-furnishing of PAN: If you do not furnish your PAN details, then tax will be collected at the rate of 10 per cent instead of 5 per cent.
Overseas education: This is good news for all students going abroad for studies. The 5 per cent TCS rate will be reduced to 0.5 per cent for those who have taken an education loan. The exemption limit of Rs 7 lakh will be allowed as long as the education loan follows the norms defined under section 80E of the Income Tax Act.
Let us understand this in simple terms from the following table:
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| Transactions under LRS and applicability of the TCS |
How do you get this TCS money back?
There are two ways by which you can get credit for the 5 per cent TCS. One is to claim an Income Tax refund, and the other is to claim TCS against your other tax liabilities for the year. If you claim a refund, you need to wait for the tax filing period.
Let me give you an example of Ankita who is working for an IT company, earning Rs 30 lakh as annual salary. Let us assume that she remits Rs 12 lakh abroad for investing in the international market. As per the new rule, she would pay Rs 25,000 (5 per cent on Rs 5 lakh i.e. 12 lakh – 7 lakh). Now, she is allowed to either claim the same as a tax refund while filing her tax return or offset against her other tax liabilities. If she does not have any income other than salary, she can submit the TCS certificate to her employer and get her TDS reduced accordingly. The same treatment applies to businesspersons for offsetting the TCS amount against their tax liability or for claiming a tax refund. You would get a TCS certificate from the deductor like you get your form 16/TDS certificate, which is proof of having tax deducted.
