The Union Budget 2020 introduced a tax collected at source (TCS) on forex transactions under the Liberalized Remittance Scheme (LRS). Under the Liberalized Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.
The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.
- What are the purposes under FEM (CAT) Amendment Rules, 2015, under which a resident individual can avail of foreign exchange facility?
Individuals can avail of foreign exchange facility for the following purposes within the LRS limit of USD 2,50,000 on financial year basis:
a) Private visits to any country (except Nepal and Bhutan)
b) Gift or donation
c) Going abroad for employment
e) Maintenance of close relatives abroad
f) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up
g) Expenses in connection with medical treatment abroad
h) Studies abroad
i) Any other current account transaction which is not covered under the definition of current account in FEMA 1999.
The AD bank may undertake the remittance transaction without RBI’s permission for all residual current account transactions which are not prohibited/ restricted transactions under Schedule I, II or III of FEM (CAT) Rules, 2000, as amended or are defined in FEMA 1999. It is for the AD to satisfy themselves about the genuineness of the transaction, as hitherto.
- What is the new tax implication on all forex transactions under LRS?
TCS at 5% shall be applicable on all forex transactions under LRS, exceeding INR 7 lakhs in a financial year, except, a) Transfers from Resident Individual Account to NRO Account towards gift / loan, wherein TCS is NOT applicable AND b) Remittances towards overseas education made out of loan obtained from a financial institution, for which TCS at 0.5% will be applicable.
Let’s understand this with the help of an example,
- What is the tax implications for transfers to NRO Account towards Gift / Loan, under LRS, by Resident Indian?
TCS will NOT be applicable and the amount remitted will not be subsumed while considering the threshold limit of INR 7 lakhs per Financial Year.
- What is the tax implication on remittances for pursuing overseas education?
TCS at 0.5% shall be applicable on the amount exceeding INR 7,00,000 in a financial year under LRS, if the amount remitted is obtained out of a loan from a Financial Institution for pursuing education.
- What is the tax implication if the amount remitted for pursuing overseas education is Owned Funds (not a loan availed)?
If the amount remitted for pursuing overseas education is owned funds, then TCS at 5% shall be applicable on remittances exceeding INR 7 lakhs in a financial year under LRS.
- What is the tax implication for remittances to Foreign Tour Operator under LRS?
Payments for foreign tour packages are also subject to the 5% TCS, without any exemption threshold i.e. TCS applicable will be at 5% of the total amount remitted and the amount remitted will not be subsumed while considering the threshold limit of INR 7 lakhs limit.
For example, if the amount remitted for Foreign Tour is Rs. 5,00,000 then TCS at 5% will be applicable on Rs. 5,00,000 as exemption for foreign tour remittance is not applicable. The TCS amount will be Rs. 25,000 (Rs. 5,00,000 x 5%)
- What is the effective date of the new income tax provision?
The new TCS provision will be effective from October 1, 2020.
- Which transactions are included in threshold limit of INR 7 lakhs, above which TCS shall be applicable?
All forex transactions under LRS for the whole year will be included in threshold limit of INR 7 lakhs except,
a) Transfers from Resident Individual Account to NRO Account towards Gift / Loan and
b) Remittances to Foreign Tour Operators.
- How TCS will be calculated?
To understand how TCS will be calculated let’s look at an example.
Let’s suppose Mr. X avails foreign exchange facility for different purposes under LRS as listed below-
A – Remittances towards Overseas/ Foreign tour programme package
B – Remittances for pursuing overseas education
C – Other LRS Remittances
D – Transfers to NRO Account under Gift / Loan
Example 1: TCS calculation if Mr. X has not utilized the threshold limit of INR 7 Lakhs per FY before October 1, 2020
Example 2: TCS calculation if Mr. X has already utilized the threshold limit of INR 7 Lakhs per FY before October 1, 2020
TCS on all forex transactions under LRS shall be applicable from October 1, 2020. However, for tracking the threshold limit of INR 7 lakhs, all forex transactions under LRS, except, 1) transfers from Resident Individual Account to NRO Account towards Gift / Loan and 2) remittances to Foreign tour operators done through the Bank made from April 1, 2020 would be considered, as illustrated in the tables above.
Please note that the foreign exchange facility availed by a Resident Individual Customer under LRS before 1st October 2020 are aggregated for arriving / tracking the threshold limit of INR 7 Lakhs only and not for applying TCS on those drawls which are made before TCS rules are effected. TCS shall be applicable on taxable LRS transactions with effect from 1st October 2020.
- Will TCS be applicable if foreign exchange facility is availed in Cash / Forex cards?
Yes, TCS at 5% will be applied on LRS transactions exceeding INR 7 lakhs if foreign exchange facility is availed through FCY Cash withdrawal at Branches / loading Forex cards.
Foreign Exchange facility availed through FCY Cash / Forex cards towards Overseas Education out of a loan from a Financial Institution attracts TCS @ 0.5% on drawl exceeding INR 7 lakhs in a Financial Year under LRS (TCS @ 5% shall be applicable in case amount drawn is not obtained out of loan from a Financial Institution).
FCY Cash / Forex Cards availed towards Overseas / Foreign tour programme, will attract TCS @ 5% and the amount drawn shall not be subsumed under the aggregate threshold limit of INR 7 lakhs.
- In case of minor accounts, the threshold limit (INR 7 lakhs) of the minor or guardian will be utilized?
If the PAN updated on the account is of the Minor, the threshold limit of the Minor will be utilized. However, if Guardian’s PAN is updated on the account, the threshold limit of the Guardian will be utilized. Accordingly, TCS would also be collected in the name of the person (minor or guardian) whose PAN has been updated on the account.
- Will GST be applied on the TCS amount?
GST will not be applicable on the TCS amount.
- Can remitter/ customer avail tax credit of the TCS?
Yes, remitter / customer can claim credit for the tax collected by the Bank while filing for their tax returns.