The government decision to tax remittances under the RBI’s Liberalized Remittance Scheme (LRS) has put investors who dabble in foreign stocks in a spot, but brokers said they should not be discouraged.
As per the new rules, from October 1, tax collected at source (TCS) will be applicable on all remittances above Rs 7 lakh at the rate of 5 per cent. In case you do not provide your Aadhaar or PAN Card, a 10 per cent TCS will be applicable.
“The main purpose of introducing this tax was for the government to widen the tax net. As per the government's findings, many individuals utilizing the LRS were not paying taxes at all,” said Viram Shah, CEO and co-Founder, Vested Finance.
The tax will impact Indian investors investing in overseas stocks, bonds and property as it increases the upfront costs of overseas investing and expenses. In dollar terms, anyone who is remitting $9,500 or above at current exchange rates will have to ..
The taxes collected, however, can be claimed back by honest taxpayers while filing returns, which is a respite, brokers said. Thus, they said this new tax should not be seen as a hindrance to investing in foreign stocks.“The new tax rule change on forex transactions should not discourage the Indian investors who are looking to invest in the US stocks or other global markets. While it increases the initial cost of the foreign transactions, the increased upfront costs can eventuallybe claimed back with tax returns. Furthermore, investors remitting less than Rs 7 lakh per year will see no impact of these rules,” said Prateek Jain, co-founder and president, Winvesta, a platform that allows you to invest in overseas markets.
The new rules say if the remittance amount is for an educational purpose, which is originating from a loan from a financial institution in India, a reduced 0.5 per cent tax is applicable on amounts exceeding Rs 7 lakh. A 5 per cent rate will be applicable to payments for foreign travel packages without any exemption threshold, but there will be no TCS if you book a foreign tour yourself instead of going through a travel agency.
TCS will not be applicable if the remitter is subject to TDS under the IT-Act 1961. For example, if you transfer money over Rs 50,000 to a non-relative NRI as a gift, you incur TDS on the remittance and not TCS. In the case of transfer between parents and children or vice versa, TCS will be applicable instead of TDS, explained analysts.
Shah said for regular taxpayers, the TCS will be available as credit or as a refund depending on the taxes they owe. “In fact, one can offset their TDS obligations. For example - salaried individuals can reduce their monthly TDS deductions,” he added.One should note that the tax is applicable only on the payer, and not on the recipient. The payer will get a TCS certificate to claim a refund while filing the annual IT returns.
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