TCS Rule On Foreign Remittance To Come Into Effect From October 1, Here's What It Means

The Centre had proposed to increase the TCS rate on international spending from 5 per cent to 20 per cent for all purposes other than education and medical treatment

The government, however, has postponed the implementation of TCS on International Credit Cards being used overseas. 

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The new rate of Tax Collection at Source (TCS) on foreign remittances is set to become applicable from October 1, 2023. Being implemented after three months of delay, new TCS rates on payments under the Liberalised Remittance Scheme (LRS) have been raised from 5 per cent to 20 per cent. It will be applicable on overseas spending on credit cards exceeding Rs 7 lakh.

However, if such expenses are for medical or educational purposes, the TCS would be levied an old 5 per cent rate. However, the government has postponed the implementation of TCS on International Credit Cards being used overseas. 

What Is RBI's Liberalised Remittance Scheme? 

The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999, (FEMA). Before 2004, fund transfer from India to other countries was under severe restrictions under FEMA. The RBI in 2004 introduced the Liberalised Remittance Scheme (LRS) to facilitate smooth foreign transactions. 

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to $2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facilities within the limit of $2,50,000 only.

What Is Tax Collection At Source (TCS) On Foreign Remittance?

The Finance Act, 2020 amended Section 206C of the Income Tax Act, 1961 and introduced 5 per cent tax collection at source (TCS) on foreign remittance under LRS on spending exceeding Rs 7 lakh during the Financial Year. For education abroad with a loan from Indian Bank, it was 0.50 per cent. 

In the Budget 2023-24, the government had proposed to increase the TCS rate on international spending from 5 per cent to 20 per cent for all purposes other than education and medical treatment, effective July 1, 2023. However, on May 19, 2023, the government clarified that any payments by an individual using their international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS.

In other words, international credit card spending up to Rs 7 lakh per financial year will not attract any TCS. TCS will only be applicable on international credit card spends above Rs 7 lakh per financial year.

What New Changes Mean For You

With the new TCS rate International travel plans will get costlier and TCS on overseas tour packages will now attract a higher TCS rate. Effective from October 1, 2023, the new TCS rates for LRS and overseas tour packages in India are as follows:

 

• LRS for education financed by the loan will Nil up to Rs 7 lakh, 0.5 per cent above Rs 7 Lakh.
• LRS for Medical treatment/education (other than financed by loan) will Nil up to Rs 7 lakh, 5 per cent above Rs 7 Lakh.
• LRS for other purposes will be 5 per cent above Rs 7 lakh and 20 per cent above Rs 7 Lakh. 
• Purchase of Overseas tour program package will be 5 per cent till Rs 7 lakh, 20 per cent thereafter. 

Concerns And Backlashs

There have been a number of concerns raised by netizens and the travel industry regarding the new TCS rates. After the government first notified the new rate in May, it became a trending topic on Twitter for the whole. Later government had to come out with a clarification on the changes being implemented. 

Now, according to a PTI report, the travel agents' body TAAI has pleased the government to abolish the decision or defer it till the next fiscal year. The report said, in a letter to the FM, TAAI President Jyoti Mayal said the TCS is a huge challenge for the travel fraternity and would lead to a lot of business being diverted to overseas tour operators. She pointed out that with GST already affecting the livelihood of Indian tour operators engaged in outbound tours, the introduction of TCS presents a double blow.

According to her, Indian tour companies are becoming less competitive when compared to operators outside India, who not only save on the 5 per cent GST but also the TCS, which ranges from 5 to 20 per cent, and they are not required to register in India.

The association in its letter also stated that the Reserve Bank of India and banks are not equipped to maintain and monitor the limits of Rs 7 lakh per traveller, and there is no mechanism to track the same.

According to a report by the Indian Express, the TCS was postponed to October 1 following resistance from customers and banks asking for time to get their systems ready. They had raised concerns regarding the implementation of the TCS on international credit card payments given the extensive tweaks required to banks’ IT infrastructure. However, now they are ready with their systems to implement the new TCS rate.