How TCS on Foreign Investments Can Be Adjusted Against Salary TDS: A Complete Guide

If you’ve recently planned an international trip or made a foreign investment, you might have noticed the Tax Collected at Source (TCS) charged on your transactions. While this may seem like an additional burden, there is now good news for salaried individuals. Starting from October 1st, 2024, salaried employees can adjust this TCS against the Tax Deducted at Source (TDS) on their salaries. This change, introduced in the Union Budget 2024-25, has come as a relief for many, as it helps reduce the liquidity crunch that often arises due to waiting for TCS refunds when filing tax returns.

This blog will take a deep dive into the implications of this new rule, how it works, and how you can

What is TCS and Why Is It Deducted?

TCS is a tax collected by the seller or remitter on certain payments made by the buyer or remitter. It is applicable on specific transactions that fall under the Liberalized Remittance Scheme (LRS), which includes payments for foreign travel, education, gifts, loans, and investments. The idea behind TCS is to ensure that the government receives tax at the point of transaction.

For example, if you are making a foreign remittance for educational fees or a holiday abroad, and the amount exceeds ₹10 lakh, the TCS rate could be 5% or 20%, depending on the type of transaction. This means that if you are paying ₹12 lakh for a foreign holiday under the LRS, the TCS collected could be ₹40,000(20%).You can refer to this blog for more details on TCS.

The Problem Before October 2024

Before October 1st, 2024, salaried individuals had to wait until they filed their income tax returns to claim the TCS amount back. This led to potential cash flow issues, as employees had to wait for the refund, which could take several months.

This was particularly problematic for salaried employees who don’t have the flexibility of adjusting such taxes through the advance tax mechanism, unlike professionals or business owners. As a result, salaried individuals often found themselves paying higher TDS on their salaries, unaware of the TCS already collected on their foreign transactions.

How the New Rule Helps Salaried Individuals

With the introduction of Form 12BAA, salaried individuals can now submit details of TCS payments directly to their employer. This allows employers to adjust the TCS payments against the TDS that is deducted from their monthly salaries. This change helps individuals avoid the liquidity crunch caused by waiting for a refund after filing their income tax returns.

What Is Form 12BAA?

Form 12BAA is a new form introduced by the Central Board of Direct Taxes (CBDT) to allow salaried employees to report their TCS payments on foreign remittances and other applicable transactions. This form helps employees disclose the TCS collected from various sources and have it adjusted against their TDS liability on salaries.

By submitting Form 12BAA to their employers, employees can:

• Report TCS collected on foreign transactions under LRS.
• Adjust TCS against the TDS deducted on their salary.
• Avoid the need to wait for a refund during the tax return filing process.

How Does Form 12BAA Work?

• Employees who have had TCS deducted on foreign remittances or other payments can fill out Form 12BAA. This form includes details about the TCS deducted on foreign transactions, such as payments for education abroad or foreign travel.
• Once the form is completed, it needs to be submitted to the employer. The employer will then adjust the TDS on the employee’s salary accordingly, accounting for the TCS that has already been collected.
• The employer will consider both the TDS and TCS to compute the final tax liability, leading to a reduced TDS deduction from the salary. This allows for a more accurate reflection of the employee’s total tax burden, without the need to wait for a refund after filing tax returns.

Importantly, the form can be submitted multiple times if additional TCS is deducted after the initial submission, ensuring that the TDS is adjusted in real-time.

What Information Does Form 12BAA Require?

Form 12BAA requires detailed information about the TDS and TCS deductions that have taken place. While the specifics can vary depending on the nature of the deductions, the form generally asks for the following information:

1. General Details:
   • Name, address, and PAN/Aadhaar number of the employee.
   • The financial year for which the form is being submitted.
2. TCS Details:
   • The section under which TCS has been collected.
   • The name and TAN of the TCS collector (usually a seller or service provider).
   • The amount of TCS collected and the corresponding transaction details.

How Will This Benefit Salaried Employees?

The introduction of Form 12BAA and the ability to adjust TCS against TDS offers several key benefits for salaried individuals:

1. Improved Cash Flow: The primary advantage is improved liquidity. By adjusting TCS against TDS, employees can avoid waiting for a refund at the end of the financial year. This means that the tax burden is spread more evenly, without requiring employees to cover the upfront cost and wait for a refund.
2. Accurate Tax Calculation: With Form 12BAA, employees can ensure that their TDS is accurately calculated based on all sources of income and taxes already paid. This reduces the chances of overpaying taxes or facing unexpected tax liabilities at the end of the year.
3. Simplified Tax Filing: Since the employer will already have the necessary information to calculate the accurate TDS, employees won’t need to go through the hassle of claiming refunds after filing their income tax returns. This reduces the complexity of tax filing and ensures that the correct amount of tax is deducted from the outset.
4. Increased Take-Home Pay: With reduced TDS deductions from the salary, employees will have more disposable income throughout the year. This is particularly beneficial for individuals with foreign investments or those making significant overseas payments.

Can TCS Be Adjusted Against Other Income Sources?

While Form 12BAA allows employees to declare TCS deductions related to foreign remittances, it’s important to note that the form can only be used to adjust TCS against the TDS on salary income. It cannot be used to directly adjust against TDS from other sources of income, such as interest from fixed deposits, capital gains, or dividends.

However, employees can still declare these additional income sources on Form 12BAA, which will help employers compute the correct TDS on salary. For example, if you receive interest income from a fixed deposit or have capital gains, you can report these details, and the employer will adjust the TDS on your salary accordingly.

Conclusion

The ability to adjust TCS against TDS is a welcome change for salaried employees, offering a significant improvement in tax management and cash flow. By using Form 12BAA, employees can ensure that their taxes are accurately deducted and avoid the hassle of waiting for refunds after filing tax returns. As the tax system continues to evolve, such steps make it easier for individuals to manage their finances, ensuring that tax deductions are optimized and that take-home pay is maximized.