Foreign remittance under LRS to attract 20% TCS from July 1, 2023

Budget 2023: How TCS on foreign remittance will affect you?

Points to be noted:

The new TCS rule will be applicable from 01st July 2023.

The Union Budget 2023 has proposed some significant changes in the tax collection at source (TCS) provisions for foreign outward remittance under the liberalized remittance scheme (LRS) of the Reserve Bank of India (RBI). The LRS allows resident individuals to remit up to $250,000 per financial year for various purposes such as education, medical treatment, travel, investment, etc. without any prior approval from the RBI.

Currently, a TCS of 5% is applicable on foreign outward remittances in excess of Rs. 7 lakh per financial year, except for education and medical purposes. For education and medical purposes, the TCS is applicable only on the amount exceeding Rs. 7 lakh. Moreover, if the source of funds for education is a loan, then the TCS rate is reduced to 0.5% on the amount exceeding Rs. 7 lakh.

However, from July 1, 2023, the budget proposes to increase the TCS rate to 20% for all foreign outward remittances under LRS, other than for education and medical purposes. This means that there will be no threshold limit of Rs. 7 lakh for such remittances and the entire amount will be subject to TCS at 20%. For education and medical purposes, the TCS rate will remain unchanged at 5% on the amount exceeding Rs. 7 lakh.

Additionally, the budget proposes to increase the TCS rate from 5% to 20% for overseas tour program packages, which include expenses for travel, hotel stay, boarding, lodging or any other expenditure related to such tours. This will also be applicable from July 1, 2023.

The TCS collected by the authorized dealer or the seller of the overseas tour program package can be claimed as a credit by the individual while filing their income tax return (ITR). If the TCS amount exceeds the tax liability of the individual, they can claim a refund of the excess amount.

The rationale behind these changes is to discourage unnecessary foreign expenditure and to curb tax evasion and avoidance by tracking such transactions. However, these changes may also increase the cost and compliance burden for genuine taxpayers who want to avail the benefits of LRS for various purposes.

Here are some examples of how new TCS rates on Foreign remittance will affect different scenarios:

Suppose an individual wants to send Rs. 10 lakh to their child studying abroad for tuition fees and living expenses. Currently, they have to pay a TCS of Rs.15,000 [5% of Rs. 3 lakh (10 lakh-7 lakh)] on this remittance. However, from July 1, 2023, they will have to pay a TCS of Rs. 50,000 (5% of Rs. 10 lakh) on this remittance.

Suppose an individual wants to invest Rs. 20 lakh in foreign stocks or property under LRS. Currently, they have to pay a TCS of Rs. 65,000 (5% of Rs. 13 lakh) on this remittance. However, from July 1, 2023, they will have to pay a TCS of Rs. 4 lakh (20% of Rs. 20 lakh) on this remittance.

Suppose an individual wants to book an overseas tour package worth Rs. 8 lakh for themselves and their family. Currently, they have to pay a TCS of Rs. 40,000 (5% of Rs. 8 lakh) on this purchase. However, from July 1, 2023, they will have to pay a TCS of Rs. 1.6 lakh (20% of Rs. 8 lakh) on this purchase.

Therefore, individuals who are planning to make any foreign outward remittance under LRS or book any overseas tour package should be aware of these changes and plan accordingly.