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The Union Budget 2023 proposed an increase in the Tax Collection at Source (TCS) rate for overseas remittances. Fund transfers made through the Liberalized Remittance Scheme (LRS) for investments in the US market would now attract a TCS of 20%, up from 5% previously for the threshold amount exceeding INR 7 lakh in a financial year.
What is TCS?
Tax Collection at Source (TCS) is a system of indirect taxation introduced by the Indian government. TCS refers to the collection of tax on certain specified goods or services at the time of transaction. The seller collects a certain percentage of the sale value as TCS and deposits it with the government.
TCS differs from Tax Deducted at Source (TDS): TDS is collected by the employer at the time of salary payment, while TCS, on the other hand, is collected only during the transaction of specified goods or services. The amount collected through TCS can be claimed as a tax credit by the buyer and can be used to offset liability for other taxes, such as income tax.
TCS on remittances was initially introduced in the Union Budget 2020. Under the old regime, 5% TCS was applied once LRS transactions crossed INR 7 lakh or when the source of funds was an education loan.
What are the new TCS rates?
| Type of remittance | Present TCS Rate | Proposed TCS Rate |
| LRS for education, financed by a loan from the financial institution | Nil up to INR 7 lakh 0.5% above INR 7 lakh | No change |
| For the purpose of education, other than the above or for medical treatment | Nil up to INR 7 lakh 5% above INR 7 lakh | No change |
| Overseas tour package | 5% without any threshold limit | 5% till INR 7 lakh 20% post the threshold limit of INR 7 lakh |
| Any other case | Nil upto INR 7 lakh 5 % above INR 7 lakh | Nil up to INR 7 lakh 20% post the threshold limit of INR 7 lakh |
What is the government’s rationale behind TCS?
The TCS increase is intended to reduce tax avoidance undertaken by certain individuals. According to the government, anyone carrying out overseas remittances is likely to have an effective income tax rate of at least 20%, which is not what they are seeing in income tax filings made by remitters. This rationale is consistent with what the government said when the government originally introduced TCS in 2020.
How does this impact US investors?
From 1 October 2023, Authorised Dealers (typically banks and remittance companies) will collect 20% TCS for remittances made for international investments exceeding a threshold of INR 7 lakh. For example, if you invest INR 10 Lakh in a calendar year, 20%, or INR 60,000 will be deducted as TCS (as per the new regime), against INR 15,000 (as per the old regime).
Can we claim credit for the 20% TCS?
Yes! The tax paid should not be confused as an additional cost or tax on the fund transfer. The TCS paid can be claimed as a credit against tax payable when filing income tax returns. If the TCS is higher than your tax payable, you will receive a refund.
Let’s look at a quick example: a resident Indian individual wants to invest INR 10 lakh in US equities. According to the TCS rules, a tax of 20% will be applied on INR 3 lakh, which means a TCS of INR 60,000 would be collected and deposited with the government.
If the individual’s tax liability is INR 80,000 at the end of the year, he will only be liable to pay the difference, INR 20,000. Alternatively, if his tax liability is INR 10,000, he will receive a refund of INR 50,000.
Essentially, the TCS credit can be used to offset the liability for other taxes, such as income tax.
How do I claim Tax Credit?
To claim the tax credit for the TCS paid, the taxpayer must mention the amount of TCS in his tax returns and also produce a certificate from the seller. The form for claiming TCS is Form 26AS, which is a statement of taxes deducted at source and tax paid by the taxpayer. This form can be downloaded from the income tax website.
Can I claim 20% TCS credit during the year?
You don’t need to wait till the end of the year to claim TCS credit. You can leverage the TCS paid to reduce other tax obligations that you might have accrued during the year to increase your cash-in-hand.
We have outlined some common scenarios to show how you can offset your tax payables by the upfront TCS amount you pay.
Scenario 1: Google employee with an INR 20 Lakh annual salary
Rahul, who works at Google, wants to remit INR 10 Lakh (about $12,200) to invest in the US markets. His monthly salary includes INR 15,000 TDS. This TDS can vary based on how the salary is structured. Under the new rule, the bank that Rahul processes the remittance will deduct INR 60,000 as TCS. He can claim the INR 60,000 as a credit when he files his income taxes and reduces his tax payable.
Scenario 2: Business owner (proprietor) with INR 30 Lakh as annual profits
Megha operates a business where she’s the sole proprietor. The business generates INR 30 Lakh in annual profit. She pays an advance tax of INR 2 Lakh every quarter.
Megha invests INR 20 Lakh in the international markets. For this remittance, INR 260,000 will be deducted as TCS. She can now claim INR 260,000 as a credit at the end of the year. She can also reduce her quarterly advance tax requirements to get credit for the TCS even before the year-end tax filings.
