Everything You Need to Know About 20% TCS on Foreign Remittance Transactions under LRS

The Union Budget of 2023 was introduced with a bunch of new policies, several social sector initiatives, and a set of new regulations to improve the Indian ecosystem. The budget became talk-of-the-town as tons of fresh policies were proposed that are likely to enhance the Indian industrial, rural and urban development.

While the significant changes made in the income tax slabs were a highlight of the Amrit Kaal Budget 2023, another noteworthy policy introduced was the 20% TCS on Foreign Remittance under the Liberalized Remittance Scheme.

Understanding TCS in Foreign Remittance Transactions

TCS, short for, Tax Collected at Source, is the type of income tax collected by the seller of selected goods and services from the buyer.

In the context of Foreign Remittance Transactions, this kind of tax can be collected from you when you send money abroad.

Here, it is crucial to note that sending money doesn’t only mean sending it to someone. It could even imply touring abroad, shopping, investing abroad, purchasing assets, etc.

The Liberalised Remittance Scheme (LRS) can help you do international transactions with great ease.

The New Update About Tax on Foreign Remittance

Before the Budget 2023, for foreign equity investments under the Liberalised Remittance Scheme, the TCS was levied at the rate of 5% for remittances exceeding Rs 7 Lacs. However, in the budget, Nirmala Sitharaman, the Finance Minister of India, has suggested changes in the TCS structure. 

Likely to be applicable from 1st July 2023, for foreign remittances for Foreign equity investment under LRS and the purchase of overseas tour programs, the TCS rates will increase to 20% without any threshold limit from the formerly applicable rate of 5% above 7 lakh.

Impact of the New Changes in TCS on Foreign Remittance Transactions 

Here is how the recent changes in TCS on Remittance Transactions can have an impact on you-

1) While Converting INR to Any Other Currency for Investment in Listed Equities/Any Other Objective

According to the proposed budget for the year 2023, the bank will be required to collect Tax Collected at Source (TCS) at a 20% rate on the aggregate amount of remittance in a Financial Year. 

Example-

Suppose an individual wants to remit and convert Rs. 20 Lakhs to US Dollars. The bank would be subject to deduct a Tax Collected at Source of 20% on Rs. 20 Lakh. Hence, here, the TCS would be Rs 4,00,000.

2) While Converting INR to Any Other Currency for an Overseas Tour Package

The bank will be needed to collect Tax Collected at Source at 20% on the aggregate amount of remittance.

Example-

Suppose that someone wants to convert Rs 30 Lakh to US Dollars for spending on overseas travel, tours, etc. Here, 20% TCS on Rs. 30 Lakh will be deducted by the bank. As per this example, the TCS would be Rs 6,00,000 here.

3) For overseas education and medical treatment, a Tax Collected at Source (TCS) of 5% will be levied for an aggregate amount above Rs 7 lakh being remitted.

How to Get Tax Benefits from the Tax Remittance under LRS

If you want to adjust your overall tax liability, you can do so by adjusting the sum deducted by the banks as Tax Collected at Source (TCS).

It can be claimed as an income tax refund. Alternatively, you can avail of credit while filing the ITR/calculating your advance taxes.

How to Adjust this TCS in IT Filings?

Step 1: You will be required to add an investment amount from your bank to the Groww USD Balance.

Step 2: The bank will then collect TCS on such investment value.

Step 3: You can then make an investment from such an amount in the US Stocks.

Step 4: The bank will deposit the collected TCS to the Income Tax Department of India. Such collected TCS will be reflected quarterly in Form 26AS.
You can view your Form 26AS after logging into the Income Tax portal using your login credentials.

Step 5: Once you are filing Income Tax returns for the assessment year, such collected TCS will automatically reflect as TCS paid to the Income Tax Department. Such TCS can be adjusted with Income Tax payable.

Let’s understand with a few examples-

• Illustration A – Mr A has a taxable income of INR 10,00,000, on which income tax payable was INR 25,000. Mr A also invested in US stocks of INR 100,000, on which TCS of INR 20,000 was collected. Other than such TCS, a TDS of INR 25,000 was deducted.
  
  In the above scenario, the tax payable is INR 25,000, and the total TDS & TCS paid is INR 45,000. Thus, once Mr A files his ITR, then an Income tax refund of INR 20,000 will be received.
  
  
• Illustration B – Mr B has a taxable income of INR 5,00,000, on which income tax payable was NIL. Mr B also invested in US stocks of INR 100,000, on which TCS of INR 20,000 was collected.
  
  In the above scenario, the tax payable is INR NIL, and the total TCS paid is INR 20,000. Thus, once Mr B files his ITR, an Income tax refund of INR 20,000 will be received.
  
  
• Illustration C – Mr C has a taxable income of INR 5,00,000, on which income tax payable was NIL. Mr B receives interest/funds from other sources of income on which tax payable was INR 8,000. Mr B also invested in US stocks of INR 100,000, on which TCS of INR 20,000 was collected.
  
  In the above scenario, the tax payable is INR 8000, and the total TCS paid is INR 20,000. Thus, once Mr B files his ITR, then an Income tax refund of INR 12,000 will be received.

Summing Up

The proposed 20% TCS on Transactions under LRS is likely to be levied from 1st July 2023. Though its impact will substantially affect the economy, its actual consequence can be computed once it comes into effect.

Hence, if you fall under any of the cases mentioned above, be set to pay off your tax liabilities as per the new regulation.