New Income Tax Provisions introduced on Forex Transactions under LRS

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New Income Tax Provisions introduced on Forex Transactions under LRS

From October 1, 2020, the tax will be collected at source from people for foreign remittances made through the Liberalized Remittance Scheme (LRS) and for purchasing foreign travel packages. TCS or Tax Collected at Source will be leviable on these transactions/payments in the event that they are above specified limits according to Section 206C(1G) of the Income-Tax Act, 1961. TCS was imposed on these transactions by the Finance Act, 2020. Notwithstanding, people can claim credit for the TCS at the hour of filing Income Tax Return in a way like TDS or tax deducted at source.

Rules regarding applicability of TCS

The provisions related to TCS will affect you in case if the transaction amount surpasses the specified limit. According to the Income Tax laws, TCS will be applicable on foreign remittances under the Reserve Bank of India’s (RBI) LRS if the aggregate amount remitted surpasses Rs 7 lakh in a financial year. In this way, if the remittance amount doesn’t surpass Rs 7 lakh, then you do not have to pay TCS.

Under LRS, resident Indians can remit/send up to $250,000 consistently for different purposes namely clinical treatment, gifts, foreign investment in real estate, stocks, and bonds. In the case of foreign travel packages, TCS will be imposed regardless of the monetary amount and the tour seller will gather the equivalent from you. Thus, whether the foreign travel package costs Rs 3 lakh or Rs 50, 000 TCS will be levied on the full amount regardless of the cost.

TCS Rates

Under current Income Tax laws, if Permanent Account Number (PAN) or Aadhaar subtleties are given, TCS on foreign remittances (above the specified limit) will be imposed at the rate of five percent. Without PAN or Aadhaar subtleties, TCS will be levied at the rate of 10%. Similar rates will be applicable on the off chance that you are purchasing a foreign travel package as well.

To give relief to the students who have taken education loans to study at foreign institutes, a concessional rate of TCS will be applicable. Dr. Suresh Surana, founder, RSM India says, “If the amount is remitted for studying in a foreign university through an education loan obtained from any financial institution in India, rate of TCS shall be 0.5 percent on amounts exceeding Rs 7 lakh.”

In any case, for a parent/student paying for studying in a foreign institute out of his/her own pocket surpassing Rs 7 lakh in a financial year, TCS will be applicable at the rate of 5 percent (if PAN/Aadhaar is given), explains Sudarshan Motwani, Founder, and CEO, BookMyForex.com. Do remember that the deduction in TDS/TCS rates by 25 percent for the financial year 2020-21 (as a relief because of the pandemic) isn’t applicable to the TCS imposed on the above mentioned financial transactions.

How the tax will be collected?

Here is the manner by which the collection of taxes on different financial transactions. Surana clarifies this with a model: Let us suppose an individual makes the following remittances under LRS during FY 2020-21 (other than for (i) seeking foreign education out of loan obtained from financial institutions in India or (ii) foreign tour package):

Month of TransferAmount (Rs)TCS Amount Collected (Rs)TCS Applicability
June 20203 Lakh0Not applicable as the amount is below Rs.7 Lakh
October 20205 Lakh5,000Applicable at the rate of 5% as total amount exceeds Rs. 7 Lakh. Levied as 5% of Rs. 1 Lakh i.e., ((3+5)-7)
December 20203 Lakh15,000Applicable on entire amount as threshold limit is crossed in October 2020
January 20215 Lakh25,000Applicable on entire amount as threshold limit is crossed in October 2020

The amount of money to be charged from your account will be determined by the bank as follows: Remittance Amount (Exceeding Rs 7 lakh) + TCS (as applicable) + GST and different other charges, if any. In case of buying a foreign travel package, the count will be as follows: Travel package amount + TCS + GST and different charges, if any.

Motwani says, “Individuals should remember that if the foreign exchange bought by him/her for traveling abroad does not exceed Rs 7 lakh in a financial year including the amount you have remitted, then no TCS will be levied on the transaction. This tax can, however, be adjusted in your income tax liability.”

Income Tax Credit for TCS

Individuals should remember that they can claim the credit of the tax gathered on the above-mentioned transactions. Surana says, “The amount so collected will be reflected in Form 26AS of the individual, and tax credit shall be available for the TCS. This can thereby help the individual reduce the overall income tax liability at the time of filing an income tax return.”

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