TCS, LRS and Foreign Tax Credit: Tax rules, limits to know before investing abroad

Dr. Suresh Surana

One of the key factors that an Indian Investor must take into account while investing in US-listed securities is the continual deterioration of the Indian Rupee against the US Dollar. Although this will attract more Indian investors who intend to make Overseas Direct Investments in the US due to its higher yields in terms of the Indian Rupee, investors making short-term Overseas Portfolio Investment might be skeptical to invest in such an environment.

Apart from rupee devaluation, several other factors such as country and economic risks, risk of liquidation and diversification, etc. must be looked into by an investor before making an investment in US-listed security.

Also Read: Parag Parikh Flexi Cap Fund: Cash holding, exposure to foreign stocks – Latest factsheet

Permissible Limit for Foreign Investments

The Central Government in coordination with the Reserve Bank of India (RBI), towards the end of August 2022, issued Overseas Investment Rules, Regulations and Master Directions which govern foreign investments made by residents of India. As per the said regulations, an Indian Resident is permitted to make Overseas Investment in foreign stocks/bonds up to US Dollars 250,000 per financial year (i.e. approximately 2 crore rupees) under the Liberalized Remittance Scheme (LRS). The said limit also covers investments made by an investor in Gift City IFSC.

It must also be noted that Indian investors are prohibited from investing in foreign entities that are engaged in real estate activity, gambling in any form and dealing with financial products linked to the Indian rupee without specific approval of the Reserve Bank.

Also Read: How dividends earned from foreign shares are taxed

Obligation to Collect Tax at Source in India

As per the provisions of section 206C(1G) of the IT Act, every authorized dealer bank must levy and collect tax at source (TCS) @ 5% where an Indian investor makes foreign investment in stocks under LRS and the amount of remittance exceeds Rs. 7 lakhs in a particular financial year. In case the Indian investor does not possess PAN or Aadhaar then such TCS would be collected at a higher rate of 10%.

Akin to other TDS/TCS provisions, such tax deducted/collected can be claimed as credit by the investor while filing their tax returns in India. However, the investor may take such TCS amount into consideration for the purpose of grossing up their investment remittances.

Benefit of Foreign Tax Credit

As per the aforesaid mentioned provisions, investors would be liable to pay tax in India on profits or gains derived from foreign investments. Such individuals may also be liable to pay tax in the US as per the headline individual capital gains tax rate. This may lead to double taxation in the hands of the investor.

So as to avoid double taxation and encourage cross-border investments, India and US have entered into a Double Taxation Avoidance Agreement (DTAA) which provides for relief from double taxation by way of availing tax credit by Indian investors for taxes paid in US. However, such deduction shall not exceed the Indian tax paid on the US income earned.

Further, to avail of foreign tax credit, investors must furnish Form No. 67 on the e-filling portal on or before the end of the assessment year where the return of income for such assessment year has been furnished within the time specified under Section 139(1) or Section 139(4).

(Author is Founder – RSM India)