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What is this new rule?
In the Union Budget 2020, the Government proposed a 5% TCS (Tax collected at Source) on remittances undertaken via the Liberalised Remittance Scheme (“LRS”) above INR 7 lakh. This new rule goes live from October 1st 2020.
Why did the government introduce this TCS?
The step was taken after a study conducted by the Income-tax Department showed that a large number of individuals sending out money had not filed income tax returns. One would expect that people remitting large amounts would be paying income taxes. However, of the 5,026 selected cases of foreign remittances, data showed that 1,807 did not file returns.
So, the government decided to introduce this TCS to widen the tax net and get tax evaders to start paying tax and NOT to further burden the existing taxpayers.
How will it work?
Starting from 1st October 2020, Authorised Dealers (typically banks and remittance companies) will collect 5% Tax at Source once LRS remittance(s) made by an individual crosses 7 Lakh in a Financial Year (Apr-Mar).
Two important notes here:
- The 5% is deducted only on the amount above 7 lakhs. For example, if you remit INR 10 Lakh in a year, 5% will be calculated on 3 lakhs i.e. INR 15,000 will be deducted as TCS
- For the current financial year, any remittances made post March 2020 will count towards the 7 lakh threshold. For example, if you have transferred INR 6 lakhs before October and you transfer additional INR 5 lakhs after October 2020, then the 5% TCS will be calculated on INR 11 lakhs – INR 7 lakhs = INR 4 lakhs. So, 5% of 4 lakhs which is INR 20K will be debited as TCS
- Note that no back-dated TCS will need to be paid. So in case you have already made remittances more than INR 7 lakhs before October 2020, no TCS is payable
Is it applicable for investing in equities abroad?
Yes, TCS shall be applicable to all the remittances under LRS including equity investments abroad (which falls under the S0001 purpose code).
Some purposes have different TCS applicable. Here’s a quick summary by purpose:
|Nature of remittances||TCS|
|Education expenses financed through a loan (you will need to show proof of loan sanction)||0.5% in excess of INR 7 lakhs in a financial year|
|Education expenses not financed through a loan||5% in excess of INR 7 lakhs in a financial year|
|Overseas Travel Package||5% of the entire amount remittedNote: There’s no 7 lakh threshold,all transactions applicable for the TCS|
|International Transaction on Debit Cards||5% of the entire amount remitted|
Note: Same as above. All transactions are applicable
|Transfer from Domestic Account to NRO account||5% in excess of INR 7 lakhs in a financial year (if purpose of transfer under LRS i.e Loan to NRI/Gift to NRI etc)|
|For any other purpose (including investments)||5% in excess of INR 7 lakhs in a financial year|
Can we claim credit for the 5% TCS?
Very much! The tax paid on should not be confused as an additional cost or tax on the fund transfer. The TCS will be reflected as tax credit in your Form 26AS. So, the amount of TCS can be claimed as credit against tax payable while filing income tax returns. In case the TCS is higher than your tax payable, you will get a refund.
I don’t want to wait till the end of the year to claim this 5%, what then?
Good question. You don’t need to wait till the end of the year! You can leverage this TCS to reduce other tax obligations that you might have during the year to increase your in-hand cash.
We have outlined a couple of common scenarios to show how you can offset your tax payables by the upfront TCS amount you pay.
Scenario 1: Google employee with a 20 Lakh annual salary
- Rahul who works at Google wants to remit INR10 Lakh (about $13,000) to invest in the US markets
- His monthly salary includes a INR15,000 TDS or Tax Deduction at Source
- This TDS can vary based on how the salary is structured, but INR15,000 is a reasonable estimate
- Under the new rule, the bank through which he undertakes the remittance will deduct INR15,000 as TCS
- Now Rahul has two options:
- He can claim the 15k as credit when he files his income taxes and reduce his tax payable then
- He can submit his TCS certificate to Google and get his monthly TDS reduced by INR3,000, thus increasing his in-hand salary
Scenario 2: Business owner (proprietor) with 30 Lakh as annual profits
- Megha operates a business where she’s the sole proprietor. The business generates INR 30 Lakh in annual profit
- She pays advance tax of INR 2 Lakh every quarter
- She now wants to invest INR 20 Lakh in the international markets. On this remittance, INR65,000 will be deducted as TCS on the 13 Lakh that is above the 7 Lakh threshold
- While she can claim the INR65,000 as credit at the end of the year. She can also reduce her advance tax requirements by INR65,000 to get the credit for the TCS even before the year end tax filings