” Synopsis “
The Indian government has introduced a 20% Tax Collected at Source (TCS) on certain international remittances under Section 206C(1G) of the Income-tax Act, 1961. Effective October 1, 2023, this regulation applies to foreign investments, international gifts, overseas tour packages, and non-educational or non-medical remittances. While many believe this is an additional tax, it is actually a prepaid tax deduction that can be adjusted against total tax liability when filing an Income Tax Return (ITR). This blog explains the impact, exemptions, compliance requirements, and financial planning strategies to navigate the 20% TCS on foreign remittances effectively.
Introduction
The Indian government has recently made significant changes to the Liberalized Remittance Scheme (LRS) to regulate outward remittances. The introduction of 20% Tax Collected at Source (TCS) on certain international remittances has been a major talking point.
Does this create a new tax burden for taxpayers, or is it simply a compliance measure? Let’s break it down.
What is the 20% TCS on Foreign Remittances?
Under Section 206C(1G) of the Income-tax Act, 1961, most foreign remittances made via the Liberalized Remittance Scheme (LRS) are subject to a 20% TCS starting October 1, 2023. This applies to payments such as:
- Deposits in foreign bank accounts
- International tour packages
- Gifts to relatives abroad
- Non-medical and non-educational remittances
- Investments in foreign stocks, bonds, and real estate
Lower Rate Exceptions
Some remittances have a reduced TCS rate:
- Medical treatment remittances: 5% TCS
- Education-related remittances: 5% TCS (0.5% if financed via education loans)
- No TCS for up to ₹7 lakh per fiscal year for education and medical remittances
For all other categories, 20% TCS applies from the first rupee.
Is 20% TCS a New Tax?
The 20% TCS is not a new tax but a prepayment of tax, meaning:
- Your bank deducts 20% upfront when you send an eligible international remittance.
- You can adjust this amount against your total income tax liability when filing your Income Tax Return (ITR).
- If the TCS deducted exceeds your tax liability, you can claim a refund.
Example:
If you send ₹10 lakh abroad for real estate investment, your bank deducts ₹2 lakh (20%) as TCS. This ₹2 lakh can be:
- Deducted from your total income tax liability, or
- Refunded if you have no tax due.
Why Did the Government Introduce 20% TCS?
1. Tracking High-Value Transactions
With more Indians investing overseas, booking luxury travel, or purchasing foreign assets, the 20% TCS ensures these transactions align with declared income.
2. Expanding the Tax Base
The TCS mechanism ensures even non-filers of tax returns are brought into the tax system. To claim a refund, they must file an ITR.
3. Timely Tax Collection
TCS ensures tax is collected upfront, reducing reliance on voluntary disclosures at the time of return filing.
Section 206C(1G) Explained
Excerpt from the Income-tax Act, 1961 (amended by Finance Act, 2023):
“Every person, being an authorized dealer, who receives an amount, or an aggregate of amounts, of seven lakh rupees or more in a financial year for remittance out of India under the Liberalized Remittance Scheme of the Reserve Bank of India from a buyer, being a person remitting such amount out of India, shall, at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, collect from the buyer, a sum equal to twenty per cent of such amount as income-tax.”
The Finance Act, 2023, raised the TCS rate for non-medical and non-educational remittances from 5% to 20%.
Key Points: TCS is a Prepaid Tax, Not an Extra Tax
Most taxpayers mistakenly see 20% TCS as an additional tax, but it functions like TDS on salary where tax is collected in advance and later adjusted.
However, it does impact:
- Liquidity: 20% of the remitted funds are held until ITR filing.
- Refund Delays: Refunds may take months post the fiscal year’s end.
Comparison: Before and After the 20% TCS Rule
| Factor | Before 2023 | After 2023 |
|---|---|---|
| TCS Rate | 5% for most remittances | 20% (except education/medical) |
| Annual Limit | ₹7 lakh exemption | ₹7 lakh exemption only for education & medical |
| Refund Eligibility | Claimable in ITR | Claimable in ITR |
| Impact on Cash Flow | Minimal | Higher upfront deduction |
Financial Planning Tips to Manage 20% TCS
Since TCS affects cash flow, consider these steps:
Plan High-Value Transactions: Break large remittances into smaller amounts below ₹7 lakh where possible.
Use Education Loans: If remitting for education, an education loan reduces TCS to 0.5%.
Adjust in ITR Filing: Ensure you claim TCS in your income tax return to avoid excess tax payments.
Consult a Tax Expert: If remitting regularly, take expert guidance on tax-efficient remittance strategies.
Conclusion
The 20% TCS on international remittances is not an additional tax but a compliance mechanism. Advance tax planning is essential to avoid liquidity issues, especially for those making high-value foreign investments or luxury travel payments.
For individualized tax guidance, consult a professional to ensure compliance while maintaining financial efficiency.