The new income tax rule introduced on foreign exchange transactions, which was supposed to be effective from April 1, 2020, was extended till October 1, 2020, and has also been amended.
Those making foreign remittances need to pay attention to their tax collected at source (TCS) liability from next month as a key tax provision kicks in from 1st October 2020.
According to the RBI guidelines, under the Liberalised Remittances Scheme (LRS), an individual is allowed to remit up to 2.5 lakh dollars in a financial year, equivalent to about Rs.1.9 crore, at an exchange rate of Rs.76.
Such remittances could be for meeting expenses such as medical or education abroad or even for investing in the stock markets.
As per the Finance Act 2020, funds sent abroad under the RBI’s liberalised remittance scheme is subject to a 5% TCS subject to certain riders.
The Government has, however, offered some carve-outs so that not every overseas remittance will be subject to TCS.
TCS shall be applicable on amounts in excess of Rs.7 lakhs 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, i.e. you want to remit the amount abroad, a TCS at 5% will be applicable on Rs 3 lakh i.e. Rs 10 lakh minus Rs.7 lakh and tax collected will be Rs.15,000.
In cases where the amount is remitted for the purpose of pursuing education through a loan obtained from any financial institute, the rate of TCS shall be 0.5% on the amount exceeding Rs.7 lakhs.
The TCS rates are to be increased by an applicable surcharge as well as Health and Education Cess in case a remitter is non-resident as per the Income-Tax Act, 1961.
Foreign exchange facility is generally taken for different purposes under LRS namely remittances to Foreign Tour Operators; remittances for pursuing overseas education and Other LRS Remittances including for buying a home, investing in international stocks etc.
GST will not be applicable to the TCS amount. And the provision will not apply in case the remitter is liable to deduct tax at source under any other provision of the Income Tax Act and the amount has been deducted and if the remitter is Government or any other person notified by the Government. The remitter can also claim credit for the tax collected by the Bank while filing for their tax returns.
The finance ministry has been extending the scope of both TDS and TCS and encouraging electronic payments to have a better idea of transactions in the economy and to be able to match the spending pattern of assessees with their reported taxable income.
