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February 2023 commenced with Finance Minister Nirmala Sitharaman presenting the Union Budget for Financial Year 2023-24. Everyone was glued to the screens anticipating how the new budget unfolds!
While the expectations from the budget for 2023 got many hits and misses, there is some news for Indian investors and residents who send money abroad!
The Union Budget FY 2023-24 proposes 20% TCS (Tax Collection at Source) on outward remittances under LRS (Liberalised Remittance Scheme).
LRS, a 2004 scheme by the RBI, allows individual residents of India to send money up to USD 2,50,000 to any foreign country in a financial year. Previously, the foreign remittance of INR 7 Lakh was tax-exempt and a TCS of 5% was applicable on the exceeding amount.
However, per the new Budget, a TCS of 20% will be applicable on all foreign remittances under LRS barring those for educational and medical purposes.
Undoubtedly, the LRS has simplified cross-border payments where it is easy to remit money to a foreign nation. But, the increased tax rate has become a cause of concern for citizens sending money abroad.
Let’s understand in detail how the proposed rate of TCS on remittances under LRS will impact citizens!
What is TCS on Foreign Remittances?
TCS aka Tax Collection at Source is an Income tax which is collected by the seller of specified goods from the buyer. The seller is liable to collect tax from a buyer at a prescribed rate and deposit the same to the Government.
Section 206C of the Income Tax Act, 1961 mentions a list of such specific items. Money remitted under LRS is also charged with TCS (foreign remittance tax).
Under the Liberalised Remittance Scheme (LRS), Indian residents can remit money via authorised dealers (ADs) such as banks or financial institutions listed by RBI. They can send a maximum of USD 2,50,000 in a single financial year (April to March).
This is valid under any permissible current or capital account transaction and even the combination of both.
Moreover, remittances up to INR 7 Lakh were exempted from TCS. Above and over this amount, a TCS of 5% was levied on the outward remittances.
The budget this financial year removed this capping of tax-free remittance. Moreover, it hiked up the 5% TCS to 20%. There is an exception for money remitted for educational and medical expenses.
Here’s a table that gives a clearer picture of the new changes in the tax charges-
For instance, if an Indian resident sends Rs. 10 Lakh (not for educational or medical purposes), the TCS will be Rs. 2 Lakh. As a result, the sender will have to give Rs. 12 Lakh.
Settlement of TCS on Outward Remittance against Income Tax
Another guideline is that TCS on outward remittances under LRS can be settled against Income Tax.
TCS like Income Tax is linked with PAN and the paid TCS amount will appear on Form 26AS. TCS is the tax that an individual has already paid and hence, it can be adjusted against tax dues and refunds.
So, how will it work? Let us explain!
For example, a sender paid Rs. 2 Lakh as TCS on LRS. Now, while filing an Income Tax Return (ITR), s/he has a tax liability of Rs. 3 Lakh. Then, s/he can adjust the TCS against the tax dues and pay only Rs. 1 Lakh as Income Tax.
Alternatively, if the sender has to pay a tax of Rs. 1 Lakh and the TCS paid for an outward remittance is Rs. 2 Lakh, then s/he can claim a refund of Rs. 1 Lakh.
Increase in TCS on Remittance – Impact on Individuals
Corporates, partnership firms, charitable trusts or HUFs (Hindu Undivided Families) CANNOT send money under LRS. Only an individual who is an Indian citizen can send money to any country under Liberalised Remittance Scheme.
Other than travel, education and medical expenses, individuals can also invest in stocks, debt instruments, mutual funds or make other investments in overseas markets. They can even lend loans to relatives settled abroad or buy immovable properties.
However, the increased tax rates, that is, TCS on LRS may become a restraint against outward foreign cash flow.
Here’s how-
1. Impact on Capital Account Transactions
As the term ‘capital transactions’ indicates, this type of remittance by Indian residents is to make capital investments in a foreign country.
Indian youth brought about a surge in the stock market. Millennials and GenZ became the driving force of equity investments. With LRS, one could presume that their participation in foreign investments and overseas markets was bound to rise.
But, will they be willing to invest in foreign markets after 20% TCS on foreign remittances under LRS?
Well, that is uncertain!
After all, if an individual wants to invest INR 5 Lakh in a foreign market, with 20% TCS, s/he has to pay an additional INR 1 Lakh as tax.
LRS capital transactions allow Indian investors to-
- Open & maintain Foreign Currency Accounts
- Purchase property
- Acquire overseas equities, investing in venture capital funds and make several foreign investments
- Set up WOS (Wholly Owned Subsidiary) or JV (Joint Venture)
- Loans to NRI relatives in INR under the Companies Act, 2013
2. International Trips and Foreign Tours
Many Indians who took international trips and foreign tours, be it for leisure, personal visits or business purposes will have to think twice.
This is because the cost of travel will get expensive with the increased TCS on LRS of 20%.
Generally, generation Y (millennials) and Z are integrating travel into their lifestyle. They are tech-savvy, risk-takers and have higher spending power than their previous generations. Flashpacking, workation and adventure trips have almost become a norm for young India.
They like to travel not just for pleasure but gain different experiences and perspectives and hence, save up money to explore new destinations.
But, with 20% TCS on outward remittances under LRS, an individual will have to pay 3 times more taxes on foreign trips.
For example, an individual saves up to INR 3 Lakh for an international tour. With 20% TCS on foreign remittances, they have to save INR 60,000 additionally.
In contrast to the new tax regime of LRS, previously the TCS was 5%. Therefore, the individual could have paid INR 15,000 as tax for LRS.
3. Impact on Current Account Transactions for Other Purposes
Under LRS, outward remittances are of two types. One is the capital account transactions that we discussed above and the other is current account transactions.
Expenses on abroad trips also come under current account transactions. Other than that, remittances for medical treatments and educational fees are also counted under this category.
Although medical and educational expenses will have the same taxation as before of 5%, all other current account transactions will have 20% TCS.
Foreign remittances for medical and educational purposes will also have the benefit of no TCS up to a limit of INR 7 Lakhs as before.
So, if someone wanted to lend money to a friend settled abroad or attend a foreign concert will have to take note of the total costs.
For every cross-border payment worth INR 10,000, an individual will pay INR 2,000 as tax which was INR 500 before.
Apart from these, current account remittances under LRS include –
- Sending gifts or money to foreign friends and family members
- Donations to charities that operate abroad
- Sending money for employment purposes
- Sending money when shifting abroad
How do ADs collect TCS on Outward remittances under LRS?
As mentioned earlier, the RBI mandates that residents can do LRS transactions only with the ADs, that is, the authorised dealers.
The authorised dealers are the banks and financial institutions permitted by the RBI to carry out LRS remittances. However, the RBI now encourages fintechs to partner with these regulated entities to promote seamless cross-border transactions.
The sender must share the PAN details which are necessary for all kinds of outward remittances, be they current or capital transactions. The AD banks calculate taxes on the amount the remitter is remitting and deposit them with the government.
The following process is how the ADs collect TCS in India under the LRS scheme:
- Calculation of TCS: The authorized bank calculates the TCS amount by applying the appropriate TCS rate defined by the government for the specified purpose of remittance
- Deduction of TCS: The AD bank deducts the calculated TCS amount from the total remittance amount and retains it in their accounts
- Deposit with Government: The AD bank then deposits the collected TCS amount with the government through appropriate tax channels
- TCS Return Filing: The AD bank is then responsible for filing a TCS return with the Indian tax authorities to report the TCS collected. The return should include details such as the TCS amount, PAN number of the remitter, and other relevant information
- TCS Certificate: The bank provides the remitter with a TCS certificate, which serves as proof of TCS payment and can be used for tax purposes
How can Cashfree Payments Help as a Payment Gateway for LRS?
Cashfree Payments, as a Payment Gateway, can help streamline the entire process of payments and TCS collection for the purpose of outward remittance. Here’s how Cashfree Payments is better than a traditional authorised dealer bank,
- Convenient and Paperless: Cashfree Payments provides a single platform for collecting payments and remitting TCS. It is completely paperless and more convenient than working with multiple authorised dealer banks.
In addition, a sender can send LRS money and TCS from their own bank accounts through Cashfree Payments. Whereas, for remittances via AD banks, the sender needs to open a savings account. This is because the sender can process remittances only with banks that already have their accounts.
- Processing Speed: Via Cashfree Payments LRS remittance solutions, TCS can be checked instantly based on the remitter’s PAN number with the AD banks. TCS can be collected through PG together with the remittance transaction with no requirement of a separate manual process.
We aim for same-day remittance settlements and clear all LRS remittance compliance requirements in the meantime.
Moreover, we have multiple modes of payments via 38+ banks and industry-first UPI payments. The remitter can also make an offline bank transfer through RTGS/NEFT.
- Fully Digitalised Flow – Cashfree Payments offer a fully digitalised flow to facilitate LRS remittance as a Payment Aggregator and TSP to AD banks.
- Infrastructure: The powerful infrastructure of Cashfree Payments automates the calculation, collection and remittance of TCS, reducing the chances of errors and increasing efficiency.
We provide real-time TCS calculation before the remittance. We also have smart FX-rate calculations to fulfil complete payment after the currency conversion.
So, if a remitter wants a seamless, completely digital and convenient way to send money across borders, we have LRS payment solutions in compliance with the RBI guidelines.
To know more, reach out to our Team!
