Foreign Remittance - New Tax Collected at Source(TCS) Law
According to the union finance bill, 2020, remittances equal to or more than 7 lakh will be attracting tax collected at the source of 5% under the Liberalized Remittance Scheme. The implication of the rule, which was supposed to be effective from April 1, 2020, is postponed to October 1, 2020.
Indian citizens are allowed to remit particular sum money to foreign for investments and other expenses during the financial year, under the Liberalised Remittance Scheme of the Reserve Bank.
The guidelines of RBI suggested that under the Liberalised Remittances Scheme, an individual is permitted to remit up to $2.5lakh abroad, effective from this financial year 2020. The remittable amount is equal to Rs 1.9 crore at an exchange rate of Rs. 76, which could be used for medical or educational expenses, and for buying property or investing in shares.
Foreign Remittance New Tax Rule
The remittance to foreign exceeding the limit of 7 lakh will be attracting tax on it. The attracted tax will be 5% if you have PAN or Aadhar and 10% if you don’t, in this financial year. The tax payable must be paid before remitting the money to the concerned bank, or the authorized financial institution remitting your money. LSR transactions like loading of forex cards or foreign exchange by withdrawing cash exceeding the limit of 7 lakh, will also be charged a TCS of 5%.
If you remit an amount of 20 lakhs abroad, exceeding the LSR limit of 7 lakh, the TCS tax rate will be 5 %. The tax will be applicable on the amount above seven lakhs only, i.e., 20 - 7 = 13 lakhs. 5% on 13 lakhs will be 65,000, which will be collected at the source of remittance.
If the amount to be remitted is for educational purposes and is obtained by taking a loan, the TCS rate applicable is not 5% but 0.5%. For the above instance, if the remittance is for the educational purposes, the TCS that needs to pay is 0.5% on 13 lakhs, i.e., 6500
Key Highlights of the Foreign Remittance Tax Change
- TCS implementation will be effective from October 1, 2020, instead of April 1, 2020.
- TCS amount paid is a tax credit and can be filed for a tax return to get a refund or can be adjusted against the tax payable.
- If NRI remits the amount, an increased surcharge, health, and education cess along with the TCS tax are applicable.
- These tax reforms are made to ensure the amount transferred abroad doesn’t escape paying Income tax.
- TCS applies to foreign travel as well and is deducted by the tour operator. TCS is calculated, including all the expenses like food, accommodation, and travel costs.
- TCS is not applicable if the remitter has already been deducted with a tax on the amount. GST is also not applicable to the TCS Amount.
Impact of the Amendment
Implementation of the amended TCS increases the paperwork, and the procedure will be prolonged to the financial institutions. The process of purchasing foreign currency for emergencies or any other purposes will become more complicated. The TCS return filing every quarterly will be an additional burden. The transactions of the NRI’s of foreign remittance will not be accounted under LRS, and the TCS applicable will differ. Disparities may occur between the bank and the customers who have availed for student loans for studying abroad, and only 95% be paid towards and the other 5% for TCS.
This is an excellent initiative started by the government to ensure law compliance of foreign remittances. An internal survey by the income tax department revealed that a large number of people remitting money abroad had not filed income tax returns. These measures are taken by the government, ensuring no individual uses foreign remittance to escape paying Income tax. Tax amendments in the Union bill related to foreign remittances have bought clarity to the taxpayers, and for the government, these will help by increasing the accountability of taxpayers.