The Finance Act 2023 has made amendments to section 206C (1G) of Income Tax Act, which deals with TCS (tax collected at source) with respect to remittances made under the Liberalised Remittance Scheme (LRS). Under LRS, all resident individuals, including minors, are allowed to remit up to $250,000 per financial year, free. It may also include remittances within India for example gifts/ loans to NRIs or investment through GIFT City units.
The Finance Act 2023 has now increased the TCS rate from 5 per cent to 20 per cent for remittances other than those for education and medical purposes, from July 1, 2023. In addition, credit card spends overseas, which were earlier not part of LRS, have now been included in the scheme. Here, we take a look at how the change in regulation affects the remitters.
Education, medical treatment
The TCS for payment made in respect of education and medical treatment overseas has not been changed in the Finance Act 2023. The TCS on education remittances is 5 per cent on amount exceeding ₹7 lakh. In case this amount is loan from any financial institution as per section 80E, then the TCS will be 0.5 per cent on amount exceeding ₹7 lakh. Similarly, remittances for medical treatment will also attract 5 per cent, above ₹7 lakh.
Foreign travel
Foreign tour packages used to attract 5 per cent TCS whereas now the new rate is 20 per cent from July 1, 2023. For instance, if you have booked a tour package worth ₹1 lakh before June 30, the TCS collected will be 5 per cent — ₹5,000 in this case and if the tour package is booked after July 1, then the TCS will be 20 per cent — ₹20,000.
Also read: New tax regime: What to keep and give up in your tax-saving investments
This makes overseas travel costlier in the short term. Another change in rule was the inclusion of credit card spends in LRS scheme, which was not there before May 16. However, now TCS will be collected on credit card spends abroad at the rate of 20 per cent, if the spending crosses the ₹7-lakh threshold. In the case of employees deputed by an organisation, and where the expenditure is borne by the latter, then such transactions shall be treated as residual current account transactions outside LRS.
Investments
Currently, if investors remit more than ₹7 lakh to invest in foreign securities under LRS, tax collected at source of 5 per cent is applied while there’s no TCS for remittance up to ₹7 lakh. However, July 1 onwards, there won’t be any such threshold while any amount of such foreign remittance will attract TCS of 20 per cent. Therefore, investors remitting money for investment after July 1 will be required to pay a TCS of 20 per cent of amount remitted.
Grey Areas
The expenditure of overseas business visits (by way of corporate or individual credit card) of employees have been excluded from LRS. However, further clarity is required on the operational aspects of how official/corporate and personal expenditure will be distinguished. The fine print of the FEMA (CAT) Rules on the threshold exclusion up to ₹7 lakh for international debit/credit cards, is awaited. It will be essential to evaluate the interplay with TCS provisions which, effective July 1, 2023, do not have a threshold for LRS remittances other than for education/medical purposes.
Also read: BL Explainer: The 20% TCS on overseas credit card spends
Raman Chopra, Joint Secretary, Department of Revenue, on June 9 stated that the ministry will come up with clarifications and FAQs which will clarify the doubts on what and how and in what manner TCS is to be collected and to what extent is the threshold available on which it is not to be collected.
How will it affect us?
The TCS paid is not based on your actual tax liability which may be less, more, or equal to the TCS paid. In case the tax paid is higher than the actual tax liability, one can claim a refund from the Income Tax department. The TCS collected on foreign remittance will not be a major concern for professionals or self-employed people as they can always adjust the TCS paid with their immediate Advance Tax liability. However, salaried people will have to wait till the date of return filing after which they may claim refund (if any).
What should Investors do?
There is a way to avoid increased TCS liability effective from July 1. Since credit and debit card spends up to ₹7 lakh will not attract any TCS, remitters can plan to use these instruments for their remittances. Travellers may buy flight tickets and make hotel reservations and do shopping using their credit card (once the relevant changes are made in FEMA Rules), provided the spend doesn’t cross the threshold of ₹7 lakh. .
Investors wanting to invest in foreign securities may consider remitting lumpsum amount to their overseas trading account in, say, mid-March and file their return before due date. Then one can adjust the TCS and can also receive refund within a few weeks, provided there are no complexities. Online investment platforms such as like Vested Finance are intimating their customers to transfer a larger amount to their accounts before July 1 so that the TCS applicable will be lower.