The central government in the Union Budget 2023 announced the increased tax collection at source (TCS) for foreign remittances under Liberalised Remittance Scheme (LRS) from 5 per cent to 20 per cent. Although these raised tax rates won’t apply to education expenses, however, there are a few categories under which parents have to pay more remittances for sending money to children studying abroad, according to a report by the Economic Times (ET).
Through Budget 2023, the government amended Section 206C of the Income Tax Act levying a higher Tax Collected at Source (TCS) on overseas tour program packages. The government hiked the TCS rate to 20 per cent from 5 per cent on overseas tour packages. 20 per cent TCS rate will also be applicable in cases where funds in excess of Rs 7 lakh are sent out of India under the Liberalised Remittance Scheme of the RBI. This will apply to foreign trips, investing overseas, sending money abroad, and other remittances except for education and medical purposes. The amendments will come into effect from July 1, 2023.
However, there are a few costs parents must pay for the upkeep of their children who reside abroad that would not qualify as an education expense for tax purposes and may therefore result in a larger TCS.
Currently, under LRS, money send for overseas education through an education loan is subject to a TCS of 0.5 per cent for amounts sent beyond Rs 7 lakh. This will not change going forward, either. However, according to the report, if the source of funding is not an education loan, then money remitted overseas even for the purpose of education attracts TCS at 5 per cent if the amount is above Rs 7 lakh.
Currently, a TCS of 5 per cent is levied on the remittances for international education (other expenses not funded by an education loan) that exceed Rs 7 lakh. There is no TCS on remittances below Rs 7 lakh. Maneet Pal Singh, Partner, IP Pasricha & Co was quoted as saying by Economic Times, “Budget 2023 has removed the threshold of Rs 7 lakh for all purposes other than education and medical treatment.”
Parents often send money to help children living abroad to meet living and various other discretionary expenses. According to the new proposal, any remittances made to help students who are studying abroad with living expenses that are not directly related to their education will now be subject to a 20 per cent TCS if the parents cannot prove that the funds were sent for educational purposes, the report said. However, If they can prove that money is being sent for education purposes, a TCS of 5 per cent will be levied once the amount exceeds Rs 7 lakh.
Vivek Jalan, Tax Connect Advisory told ET, If your child stays in the hostel of the university, you can establish that it is for the educational purpose. Then, a TCS of 5 per cent will be applicable if the remittances are above Rs 7 lakh.”
He added that those who live in flats outside the campus or shared apartments or rented accommodations might find it difficult to establish the education link.
"TCS is not a tax by itself, and credit of the amount of TCS paid on any transaction is available to the person who has paid the amount of TCS to adjust against her tax liability for the financial year," said Sanjeev Sachdeva, Partner, Luthra and Luthra Law Offices India.
"The increase from 5 per cent to 20 per cent in the rate of TCS would significantly increase the burden on any person remitting funds under the LRS scheme, even though the amount of TCS will be available for adjustment against the tax liability" Sachdeva added.
"In case of a person filing the tax return, it will be a cash flow issue as credit of TCS recovered from him can only be claimed in the tax return (either as adjustment of tax or as a refund of tax)," said Sumit Mangal, Partner, Luthra and Luthra Law Offices.