New Tax Provision Enacted by Finance Act 2020 (Budget 2020) – Section 206C(1G)
Reference to Budget 2020, as passed by Govt of India in parliament, a new sub section 1G has been inserted in TCS (Tax Collected At Source) Section 206C to tax foreign remittance transactions under Liberalised Remittance Scheme. The section will be effective from October 1, 2020.
Liberalised Remittance Scheme (LRS)
LRS is governed by RBI Regulations. Under the RBI LRS Regulation, Indian Residents are allowed to remit 250,000 USD (approx. Rs 2 Crore) per financial year outside India. Under the LRS regulations, these remittances can be towards:
- As an expense outgo: Travel Exp, Donations, Study Exp, Medical Exp, Gift to Non-Resident Relatives etc
- As an investment: Bank Account, Shares, Debt Instrument, Immovable Property etc.
The LRS limit of 250,000 is per financial year basis. Hence, a person can remit this much amount every financial year. Also, this limit is irrespective of person age. Hence, a minor is also eligible for this scheme.
5% Tax Collected at Source (TCS) on Liberalised Remittance Scheme Transactions
Budget 2020 has inserted a new tax provision i.e. section 206C(1G), where it imposed a Tax Collection at Source (TCS) @5% on the remittance made under LRS Scheme. Here is the extract of section:
206C (1G) Every person,—
(a) being an authorised dealer, who receives an amount, for remittance out of India from a buyer, being a person remitting such amount out of India under the Liberalised Remittance Scheme of the Reserve Bank of India;
shall, at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, by any mode, whichever is earlier, collect from the buyer, a sum equal to five per cent of such amount as income-tax
As per this provision, now any person who is remitting money abroad under LRS scheme will have to pay additional amount in the form of TCS to the Authorised Dealer (i.e. Bank, any other agency etc). Hence, extra cash outflow. This new levy is applicable from October 1, 2020.
Monetary Limit for TCS on LRS Transactions
As per the proviso of section 206C(1G), TCS shall be applicable if total remittance amount during a year exceeds Rs 7 Lakh. Also, the TCS shall be levied on amount over and above Rs 7 Lakh. Hence, if during the year a person remit 18 Lakh Rs (via 3 transactions of Rs 6 lakh each) then TCS shall be applicable @5% on 11 Lakh Rs (i.e. 18 Lakh – 7 Lakh).
0.50% TCS on LRS Transactions For Education Purposes
At the time of passing the Budget, the finance minister has provided a relaxed TCS of 0.50% on LRS remittance made for education purposes (though in budget proposals it was proposed @5%, however, at the time of passing budget in parliament the reduced rate is proposed for LRS Education Purpose). This relaxation is applicable if the amount is being remitted out of the loan taken from approved Financial Institutions in India (as provided in section 80E of Inc Tax Act). Also, the 0.5% will be levied on the amount over and above Rs 7 Lakh only. E.g. if a Resident remit 15 Lakh Rs in a year for education purposes out of the loan taken from financial institution, then TCS shall be 0.50% of 8 Lakh (15 Lakh–7 Lakh).
Refund of TCS
TCS amount so paid by the remitter of money, will be available as a tax credit to the Remitter at the time of filing of ITR. If there is no tax payable, TCS amount can be claimed as refund back from Income Tax Department.
FAQs on Tax Collected at Source (TCS) on Liberalised Remittance Scheme Transactions – Affecting Residents, Non-Residents (NRIs, PIOs, OCIs)
Q. What is Liberalised Remittance Scheme (LRS)?
Under LRS scheme, which is governed by RBI Regulations, a Resident Indian can remit 2.50 Lakh USD per financial year outside India for expenses (travel expense, gift, donation etc) or Investment purposes (property purchase, bank account, shares etc).
Q. What is the TCS taxation levied by Budget 2020 on LRS Remittances?
5% if remittance exceeds Rs 7 Lakh.
Q. What are the TCS Taxation reliefs provided for LRS Remittance for Education?
TCS rate is 0.5% if remittance is out of loan from specified financial institutions.
Q. What is monetary limit on which TCS is applicable on LRS transactions?
TCS is applicable if LRS remittance in a year exceeds Rs 7 Lakh.
Q. Whether TCS is applicable on whole amount of LRS remittance?
No. TCS is applicable on LRS remittance exceeding Rs 7 Lakh.
Q. What is the impact of TCS on Non-Residents?
Non-residents, who used to receive money from Resident relatives in India, will face a less cash inflow as the TCS will be collected by the banks on the remittance amount. Hence, if a Resident Indian wishes to send a gift remittance or other remittance to his/her Non-Resident Relatives (NRI, Foreign Citizen) then out of the total cash flow available with Indian Resident there will be a Tax Collected at Source also by Bank. To that extent remittance amount will be reduced. Hence, less cash inflow to Non-Residents.
Q. Whether TCS is applicable on money being remitted by NRIs, Foreign Citizens from NRO account to NRE/Foreign Account?
No. Remittance by NRIs, PIOs, OCIs from their NRO account is covered under USD 1 Million Scheme. TCS u/s 206C(1G) is not applicable on USD 1 Million Scheme of NRIs, PIOs.
Q. What is the other transaction where TCS is levied under section 206C(1G) i.e. TCS on Foreign Travel?
In addition to TCS on LRS transactions, Budget 2020 has also imposed a TCS @5% on foreign travel expenses. Section says that 5% TCS shall be collected by the seller of overseas tour program package in relation to selling of overseas tour package. There is no monetary limit for this TCS. Hence, in summary, TCS @5% is applicable on foreign travel expenses, which shall be collected by the tour package seller from the buyer of tour package irrespective of the amount of package.
Q. What is the effective date when TCS u/s 206C(1G) will be applicable?
With effect from October 1, 2020. Before that this TCS is not applicable.