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5% tax on foreign fund transfers that may go up to 10% for some
September, 11th 2020

Tax collected at source (TCS) at the rate of five per cent will be imposed on the money remitted outside India. However, if the remittance is made out of a loan taken for higher education, the TCS rate will be 0.5 per cent of the money remitted. The Finance Act, 2020 has inserted a new sub-section (1G) in Section 206C in this regard.

The remittances on which TCS will apply are those where money is sent outside under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI) or buying tour packages.

LRS allows resident individuals to remit up to $250,000 per financial year to pay expenses related to travelling, medical treatment, studying, gifts and donations, maintenance of close relatives, among other things.

Besides, the remitted amount can also be invested in shares, debt instruments, and to buy immovable properties abroad. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

However, LRS does not allow buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines and so on.

Also, money can't be remitted to countries identified by the Financial Action Task Force as “non cooperative countries and territories".

The new income tax rule introduced on foreign exchange transactions will be effective from October 1, 2020. Naveen Wadhwa, deputy general manager, Taxmann, says, "The Finance Act, 2020, has inserted a new sub-section (1G) in Section 206C, with effect from October 1, 2020. This provision provides for the collection of tax by an authorised dealer (dealing in foreign exchange or foreign security) or overseas tour operator."

Simply put, foreign remittance made above Rs 7 lakh will attract a tax-collected-at source (TCS) unless the tax has already been deducted at source (TDS) on that amount.

How it works: Keep in mind that the TCS will be applicable on the amount in excess of Rs 7 lakh in a financial year and not on the total amount. For example, if the total foreign exchange facility availed under LRS in a financial year is Rs 10 lakh, and you want to remit the amount abroad, a TCS at 5 per cent will be applicable on Rs 3 lakh. (Rs 10 lakh minus Rs 7 lakh) and tax collected will be Rs 15,000. In another example, if a person is remitting Rs 10 lakh for any purpose (other than for the purchase of overseas tour package), he has to make a payment of Rs 10,15,000 (RS 10 lakh plus 5 per cent of Rs 3 lakh).

"No such relaxation of threshold is available to buy overseas tour packages," explained Sandeep Sehgal, director-tax and regulatory at AKM Global.

Why this rule: Ashok Shah, Senior Partner, NA Shah and Associates, says, "This move is curtailed tax avoidance. Many who have been transferring funds abroad under this scheme did not file income tax returns. People remitting large sums ideally should be in the income tax bracket and paying income tax." Your local Kirana store owner, for instance, doesn't file returns but could be heading for a fancy tour every second year, with the whole family. Balwant Jain, Tax expert, and Chief Editor, Apnapaisa says, "So, to trace the tax evaders, this section has been amended to identify the person making remittance in excess of specified limit but not furnishing return of income."


The rationale behind the introduction of TCS is that the income tax department has made several observations that the amount sent by the persons outside India does not get corroborated with their income tax returns, Sehgal said.

"So, in order to prevent undue tax leakage and failure to disclose such information by persons, this provision has been introduced," he said.

Foreign Tour Operators: Jain says, "The tax shall be collected on the amount or aggregate of the amount in excess of Rs 7 lakh if the remittance is made for a purpose other than for the purchase of an overseas tour package. If the remittance is made for the purchase of an overseas tour package, then threshold limit of Rs 7 lakh shall not apply, and tax shall be collected on the total amount of remittance." The tax shall be collected at the rate of 10 per cent if PAN has not been furnished.

Studying Abroad: For students planning to go abroad for studies, and who have taken an education loan from a financial institution, rate of TCS shall be 0.5 per cent on the amount exceeding Rs 7 lakh. Wadhwa says, "At the rate of 0.5 per cent, if the amount being remitted out has been sourced from an education loan as defined in Section 80E. If the buyer does not furnish his PAN, the tax shall be collected at the rate of 5 per cent."

Any other purpose: Wadhwa says, "Where the amount is remitted for any other purpose under LRS, the tax shall be collected at the rate of 5 per cent if the buyer has furnished his PAN. Otherwise, the tax shall be collected at the rate of 10 per cent."

The TCS will be collected at the time of receipt of the amount, or at the time of debiting the amount payable whichever is earlier. The rate shall be further increased by Surcharge and Health & Education Cess if the buyer is a non-resident person or a foreign company. TCS will be collected by the authorized dealer or the seller of the package.

Shah says, "The sum paid as TCS will be allowed as credit while furnishing return of income. If there is no tax liability, the sum can also be collected as a refund." Under the Reserve Bank of India's liberalised remittances scheme, individuals can remit a maximum of $250,000 abroad every year.

Things to remember: Shah says, "Be careful that you give all correct details when dealing with banks, tax-related matters etc. Check that TCS credit has come to your account by going to the income tax website. For an honest person, there is nothing to fear after October 1."

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