TCS on remittances under LRS increased to 20%

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) would now attract a TCS of 20%, up from 5% previously. This will apply to remittances made for family maintenance abroad, overseas travel packages, international investing, and other purposes excluding foreign healthcare and education. 

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. In this previous regulation, 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
For the purpose of any education if the amount being remitted out as a loan obtained as defined in section 80E	0.5% of the amount or the aggregate of the amounts in excess of INR 7 Lakh	No change
For the purpose of education, other than the above or for medical treatment	5% of the amount or the aggregate of the amounts in excess of INR 7 Lakh	No change
Overseas tour package	5% without any threshold limit	20% without any threshold limit
Any other case	5% of the amount or the aggregate of the amounts in excess of INR 7 Lakh	20% without any threshold limit

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 1st July 2023, Authorised Dealers (typically banks and remittance companies) will collect 20% TCS for remittances made for international investments. For example, if you invest INR 10 Lakh in a calendar year, 20%, or INR 2 Lakh, will be deducted as TCS.

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 1 Lakh in US equities. According to the TCS rules, a tax of 20% will be applied, which means a TCS of INR 20,000 would be collected and deposited with the government.

If the individual’s tax liability is INR 50,000 at the end of the year, he will only be liable to pay the difference, INR 30,000. Alternatively, if his tax liability is INR 10,000, he will receive a refund of INR 20,000. 

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 200,000 as TCS.He can claim the INR 200,000 as credit when he files his income taxes and reduce 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 400,000 will be deducted as TCS. She can now claim INR 400,000 as 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.