As the 20% TCS on international remittances is set to take effect, we unwrap its enigma here

New Delhi: Travelling to a foreign destination or sending money abroad will be subject to a higher tax rate, with a 20 percent tax collected at source (TCS) kicking in on July 1, 2023.

It is important to note, however, that those who send money overseas for education or medical treatment will continue to pay a lesser rate (i.e. five percent) for remittances in excess of Rs 7 lakhs under the Liberalised Remittance Scheme (LRS). Despite the fact that the new tax is slated to go into force on July 1, a number of questions remain.

Some tax professionals were previously perplexed about the tax treatment of a variety of expenses, such as the amount spent on private accommodation for a child's stay abroad during his or her schooling. With the Finance Ministry’s clarifications, taxpayers and experts can breathe a sigh of relief.

However, those new to the world of personal finance and unaware of how this TCS factor works under LRS must first learn to unwind their minds to understand basic concepts before moving on to interpret the nitty-gritty of the same.

Learning more about TCS

It stands for tax collection at the point of origin. Section 206C of the Income Tax (IT) Act of 1961 provides for TCS in the business of trading in alcohol, spirits, forest produce, scrap, and so on.

The TCS is levied under Subsection (1G) on foreign remittances made through the Liberalised Remittance Scheme (LRS) and on the sale of international travel packages.

What attracts TCS?

TCS rates applicable to remittances for education and medical treatment shall apply to remittances for travel and incidental expenses related to education and medical care, respectively. The Ministry of Finance stated that a more complete explanation will be published separately.

In excess of Rs 7 lakhs, the TCS rate on foreign remittances for education via loans from financial institutions will be 0.5 percent.

What is LRS?

The LRS allows Indian residents to send up to $ 250,000 in one year without obtaining approval from the Reserve Bank of India (RBI). Any remittance in excess of this amount necessitates an official nod from the regulator.

No, it doesn’t. If the TCS payee is a taxpayer, the TCS can be claimed as a credit when filing an income tax return. In these two categories, no changes have been made. The situation is unchanged as before the Finance Act 2023.

Interpreting the latest amendment

A notification dated May 16, 2023, eliminates the previous exemption granted to credit card customers who used them internationally, and their usage was not counted under the LRS. The main impact will be noticed in assets such as real estate, bonds, and equities outside of India, as well as tour packages or presents to non-residents.