If an individual plans to go on a foreign vacation or invest in stocks or real estate abroad, he will have to shell out a higher tax collected at source (TCS) from July 1 as the government has proposed to increase the rate of TCS on foreign remittances under the Liberalised Remittance Scheme (LRS) to 20% from 5%. However, the revised rate will not apply for remittances made for the purpose of foreign education and medical treatment. The increase in TCS rate under LRS is primarily to target high-value discretionary spending.
At present, TCS on remittances made for booking overseas tour packages is 5% without any threshold limit. Similarly, remittances made for foreign education not funded through an education loan attracts TCS of 5% on the aggregate amount over Rs 7 lakh in a financial year. For remittances made for foreign education through a loan obtained from any financial institute as defined in Section 80E or for the purpose of medical treatment, the TCS rate is 0.5% of the aggregate amount above Rs 7 lakh. There is no change in the prevailing provisions of TCS on foreign remittance under LRS for education and medical purposes.
Unlike TDS, where tax is deducted when one receives payment, TCS is collected on the expenses made. Under the LRS scheme, individuals can remit upto $250,000 per year without seeking permission from Reserve Bank of India.
Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm, says the hike in the TCS rate from 5% to 20% on LRS would mean that foreign travel will now be costlier. “It effectively means that the tour operator will have to collect 20% of the cost of the overseas tour package from the travellers irrespective of the amount of the package. This would increase the cash outflow immediately for the travellers,” he says.
How to adjust the TCS
The TCS collected on behalf of the customers will be reflected in their respective Form 26AS, which is allowed to be taken as credit at the time of filing income-tax return (ITR). “The TCS credit shall be refunded in case the total and final tax payable is less than the TCS collected. No interest will be received on the blocked TCS amount,” says Maheshwari.
Maneesh Bawa, executive director, Nangia Andersen LLP, says the TCS can be claimed as income-tax refund in cases where there is no taxable income, or as a credit at the time of filing the ITR, or for the purposes of computing advance tax. “While taxpayers can claim credit or refund for TCS applicable on specified remittances, it does cause cash flow issues,” he says.
Remittances for education
Parents often remit money to their children studying abroad. If the parent can establish that the money is for education purposes, TCS will be 5% if the aggregate amount is over `7 lakh. The reason for remitting the money abroad will have to be mentioned in the remittance form.While it will be easier to establish the purpose of education if the funds are for tuition fees or hostel expenses, it may be difficult if the student stays in a rented apartment. If the parent fails to establish the education link, the TCS will be applicable at 20% without any threshold limit. So, those studying abroad should prefer to stay in a university-provided accommodation to reduce cash outflow issues because of the increase in TCS rate.