Understanding TCS on Foreign Remittance

In latest news for investors putting their money in global stock markets, fresh amendments have been introduced to the Finance Bill, 2020. A new provision, under the Liberalised Remittance Scheme (LRS), will come into effect from 1st October 2020, and it would levy a TCS (Tax Collected at Source) at a rate of 5%. This would affect incoming fund transfers to your international investment account and the rate would be levied on remittances above ₹7 lakh within a financial year.

Click here to read our CEO’s take on the policy published on LiveMint.

In line with the latest amendment, all individuals remitting funds via LRS will have to pay the tax collected at source for spends on medical treatment, gifts, maintenance of relatives abroad, foreign education, and investment in real estate, stocks and bonds.

They will however be able to adjust these spends against their tax liability while filing income tax. Similar to tax deducted at source (TDS), the tax paid under TCS can be claimed back fully or partially as a refund while filing income tax return if the total income is below the tax threshold limit for the year. It can also be adjusted against an individual’s overall income tax liability.

How it works

After 1st October 2020, your authorized dealer (the bank facilitating the foreign exchange) will collect a tax of 5% when you transfer funds internationally under the LRS scheme on the value of the fund transfer taking place in a financial year. For the current financial year, any remittances from April 2020 will count towards the 7 lakh threshold. However, your previous fund transfers before October 2020 will not be affected.

Illustrations

1) TCS of 5% is deducted only on the amount above 7 lakhs. For example, if you remit Rs 15 lakh in FY 2021, 5% will be calculated on the amount exceeding the existing threshold i.e. – 8 lakhs. Therefore, Rs 40,000 will be deducted as TCS.

2) Any remittance made in FY 2021 will count towards the 7 lakh threshold. For example, if you have transferred Rs 5 lakh before 1st October 2020 and you transfer additional Rs 10 lakh post that, then the 5% TCS will be calculated on Rs 8 lakh ( Rs 15 lakhs minus Rs 7 lakh). 5% of 8 lakh which is Rs 40,000 will be deducted as TCS. However, no back-dated TCS will need to be paid.

Note: This policy will be applicable only for Indian Resident investors who fund their account via the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme.