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Are you planning to take a foreign trip, invest in international shares, or purchase any other assets abroad in 2023? Then, you have some significant changes waiting for you.
The 2023 Union Budget saw some major modifications to personal finance and taxation. One of these changes is the increase in TCS on foreign transactions. Effective July 1, 2023, the government has raised the Tax Collection at Source (TCS) on foreign remittances from 5% to 20% under the Liberalised Remittance Scheme (LRS). The LRS is a foreign exchange policy that is intended to simplify and facilitate foreign transactions outside India.
But now, the rise in TCS rates and the inclusion of international credit card spending under the purview of LRS will change the foreign remittances landscape. How? Read on to know more.
People who send money abroad for remittances, travel, shopping, asset purchases, and investments in foreign stocks are obliged to pay TCS or Tax Collected at the Source under LRS.
For perspective, the Reserve Bank of India's (RBI) Liberalised Remittance Scheme is a framework that allows individuals residing in India to send money overseas for a variety of reasons, including travel, education, investments, medical costs, and so on. This scheme streamlines the process of remitting funds outside India up to $250,000 in a financial year without any restrictions.
Now, in the 2023 Union Budget, the TCS rate for most of the remittances (barring those that go towards healthcare and educational expenditures) was raised from 5% to 20%. This change is intended to boost tax revenue and encourage spending within the country.
While education and medical remittances will continue to be at 5% for amounts over Rs. 7 lakhs, the new 20% TCS rate will take effect from July 1, 2023. However, the good news is that taxpayers can claim TCS deductions as refunds or credits on income tax returns, allowing them to lower their tax amounts.
Here are the details of the new TCS rate on different foreign remittances-
|Cases||Type of Remittance||Current Rate of TCS||New TCS Rate|
|Case 1||For education purposes (education loan taken from any financial institution)||0.5% of the amount or the aggregate of the amounts beyond a threshold limit of Rs. 7 Lakhs||No Change|
|Case 2||For education purposes, other than use case 1 (mentioned above)||5% of the amount or the aggregate of the amounts beyond the limit of Rs. 7 Lakhs||No Change|
|Case 3||Overseas Tour Package||5% without any threshold limit||20% without any threshold limit|
|Case 4||Other cases (foreign investments, asset purchases, international credit card payments, etc.)||5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakhs||20% without threshold|
According to the Economic Times, outward foreign remittances reached an all-time high in 2022. This was during a period when the rupee was at its weakest. The new rates for tax collected at source for foreign remittances was introduced by the government to improve this situation.
With the new TCS rate, the Indian government aims to encourage its citizens to spend their money within India and increase its revenue. They intend to do so by leaving high taxes on foreign tour programs. Additionally, the inclusion of international credit card payments under the purview of LRS can help bring uniformity in the treatment of debit and credit cards when it comes to foreign remittances.
According to the newly proposed Budget 2023, financial institutions must collect TCS at a rate of 20% of the total remittance amount (other than educational and medical expenses) within a fiscal year. This is applicable to people transferring funds to invest in foreign stock exchanges.
Example: A person wishes to remit and convert Rs. 5,00,000 to US dollars. On Rs. 5,00,000, a TCS of Rs. 1,00,000 would be deducted at the rate of 20%.
As per the proposed Budget of 2023, the bank is required to collect 20% TCS on the remittance aimed at foreign travel during a financial year.
Example: You wish to convert Rs. 7,00,000 to US dollars to spend on an abroad trip. Here the bank will deduct TCS at the rate of 20% on Rs. 7,00,000, which equals Rs. 1,40,000 in TCS.
A TCS of 5% will be applicable for an amount that exceeds Rs. 7,00,000 being remitted. This is applicable only for remittance pertaining to medical and educational purposes.
Example: If your remitted medical or educational expense for the year is Rs. 9,00,000. Then a TCS rate of 5% will be applicable on Rs. 2,00,000 (9,00,000 – 7,00,00). It is the excess amount after Rs. 7,00,000. Hence your TCS would be Rs. 10,000.
While filing your taxes, you can claim your TCS money as tax deductions. You can go about the process in one of two ways:
1. Claim it as an income tax refund.
2. Claim it as a credit when you file your ITR or calculate your advance taxes.
For example, you decide to invest Rs. 10,00,000 Lakhs in the US stock market. As per the new system, the TCS on this remitted amount would be Rs. 2,00,000 (20% of Rs. 5,00,000).
Now, assume that your total tax liability for the financial year is Rs. 3,00,000. You can lower this tax liability by claiming an income tax refund on your remitted TCS amount. With this, your overall tax liability is reduced to Rs. 1,00,000.
The increase in tax collected at source for foreign remittances is intended to encourage domestic spending and increase tax revenue. Hence, if you're planning to invest in international stocks or purchase assets, you can avoid this TCS tax implication on remittance by investing in India.
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