TCS on sending money abroad is 20% in many cases: Will Budget 2025 reduce this to 5%?

In a move to strengthen fiscal oversight and streamline foreign exchange transactions, the government introduced Tax Collected at Source (TCS) on remittances to foreign countries made under the Liberalized Remittance Scheme (LRS). It is a route available to resident Indians to send money abroad for various purposes like buying a house, investing in foreign equity or paying university fees to study abroad. This regulatory change aimed to enhance transparency and accountability in cross-border financial activities while aligning with global taxation practices.Also read | Dividends are taxed at nearly 50%: Will Budget 2025 reduce income tax rate on dividends?

What is TCS and LRS scheme of RBI?

Tax Collected at Source (TCS) is the tax collected by the seller or service provider from the buyer at the time of sale of a service or a good. It is levied to track certain transactions and to ensure tax compliance.
The Liberalized Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), permits resident individuals to remit money up to a specified limit in a financial year for permissible current or capital account transactions. Current transactions permitted under LRS include incurring Foreign Travel expenses, medical treatment expenses, education fees, etc. Capital transactions permitted under LRS include Purchase of foreign property, investment in foreign equity, etc.

Also read | Tax break on buying EV: Will govt bring this interest deduction on buying electric vehicles back in Budget 2025?

Current income tax rules for TCS on LRS

The various remittances made by resident individuals are subject to TCS under section 206C of the Income Tax Act, 1961.

Remittances made under the Liberalized Remittance Scheme (LRS) for:

Education:
According to section 206C(1G) of the Income Tax Act, an authorized dealer (such as bank) is required to collect 0.5% of a remittance amount exceeding Rs. 7 lakh per financial year from individuals. TCS at 0.5% will be collected on sending money abroad where the money is sourced from educational loans taken from recognized financial institutions or approved charitable institutions. Education loans taken as per conditions specified under the Income Tax Act are eligible for certain tax breaks mentioned under section 80E of the IT Act.
If the money being sent abroad is from own funds, the TCS rate is 5% on the amount exceeding Rs. 7 lakh. Similarly, TCS will be at 5% if the taxpayer has availed any other type of educational loan from a financial institution or charitable institution not covered under Section 80E.

Remember TCS is collected only if the total amount exceeds the specified limit and on the portion of remittance exceeding the specified limit. If the remittance amount does not exceed Rs 7 lakh in a financial year, then no tax will be collected.

Medical:
An authorized dealer (such as bank) must collect 5% TCS from individuals who remit amounts exceeding Rs. 7 lakh per financial year outside India under LRS for medical treatment. Here also, TCS will be collected only if remittance exceeds Rs 7 lakh in a financial year and on the portion of remittance exceeding Rs. 7 lakh.

Any other purpose:
Remittances made for any other purpose (other than education, medical and travel) will attract a TCS rate of 20% if the remittance exceeds Rs 7 lakh in a financial year. Previously, the TCS rate was 5% on remittances exceeding Rs. 7 lakh per financial year. Post amendment by the Budget 2023, the rate was increased to 20% without any threshold from July 1, 2023.

However, practical difficulties led to the restoration of Rs. 7 lakh threshold for TCS on all categories of payments under LRS payments. This restoration was announced in a Ministry of Finance press release dated June 28, 2023. The increased rate came into effect from October 1, 2023, instead of July 1, 2023. For instance, TCS at 20% on amount exceeding Rs. 7 lakh will be applicable on buying shares of Apple if remittance exceeds Rs 7 lakh in a financial year. If the remitted amount does not exceed Rs 7 lakh, TCS will not be applicable.

Travel:
Following the finance ministry’s press release on June 28, 2023, the TCS rate remained at 5% for remittances up to Rs. 7 lakh per individual per financial year for the purchase of overseas tour packages.

TCS rates applicable for various LRS remittances are tabulated below:

Further, it is pertinent to note that the government has decided to postpone the inclusion of international credit card transactions under the Liberalized Remittance Scheme (LRS) until further notice. Consequently, such transactions are currently exempt from TCS rules under section 206C(1G) of the Income Tax Act.

Need to reduce high TCS rate of 20% to 5%

The 20% TCS rate on non-essential remittances under the LRS has raised significant concerns due to its far-reaching financial and economic implications. A high upfront tax rate blocks a substantial portion of funds at the time of remittance, creating liquidity challenges, particularly for middle class individuals. This blockage of funds not only increases the immediate cost of remittance but also discourages legitimate discretionary expenses such as overseas investments, travel, etc.

Furthermore, the global competitiveness of India’s financial system could be adversely impacted. In an increasingly interconnected world, individuals and businesses frequently engage in cross-border financial activities. By imposing a steep TCS rate, India risks discouraging such legitimate international transactions, potentially making its financial ecosystem less attractive compared to countries with simpler and less costly systems for foreign remittances.

While the TCS amount is available for adjustment or refund during income tax return filing, the process may be delayed, intensifying liquidity concerns and inconveniencing taxpayers. Additionally, the economic opportunity cost of blocked funds is significant, as these could otherwise be directed towards productive activities like investments or consumption that contribute to domestic growth.

There is also a risk that such high rates could encourage individuals to explore alternative informal routes for cross-border transactions, which would undermine the government’s objective of promoting transparency and compliance. Rationalizing the 20% TCS rate to a more reasonable level could alleviate these challenges, ensuring smoother financial operations for taxpayers while maintaining the government’s ability to monitor and regulate foreign remittances effectively.

Lowering the TCS rate to 5% (from 20%) in such cases would reduce the amount of funds blocked initially, thereby improving liquidity for taxpayers. By reducing the TCS rate, the government may still be able to effectively monitor and manage high-value foreign exchange transactions for tax compliance.

(The article is written by Dr Suresh Surana, a practising chartered accountant.)

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