[Explained] 5% tax to be levied on foreign fund transfers: Know rate, exception, impact

New Delhi: Starting October 1, people making foreign remittances need to pay attention to their tax collected at source (TCS) liability. 

The Reserve Bank of India’s (RBI) liberalised remittance scheme (LRS) allows an individual to remit up to $250,000 every year. The provision to collect tax on remittances was introduced in the Finance Act 2020.

Payments for foreign tour packages are also subject to the 5 per cent TCS, without any exemption threshold. The tax goes into effect from October 1, 2020.

At what rate is it levied and exclusions?

TCS applies only once aggregate remittances exceed Rs 7,00,000 during a fiscal year. It is levied at 5 per cent, however, if you do not provide PAN or Aadhar, to the Authorised Dealer, TCS will be deducted at 10 per cent.

Kush Vatsaraj, Associate, TP Ostwal & Associates LLP said: “A concessional rate of 0.5% applies to foreign remittances out of an education loan from a financial institution.”

He further added: “Remittances from which the remitter themself is liable to deduct taxes at source are exempt e.g. royalty, professional fees, rent remitted overseas to NRI landlord. Central and state governments, local authorities, and foreign diplomatic remitters are exempt.”

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.

In case, transfer is from already tax-paid income?

The TCS can be set off against the overall liability of the taxpayer. If the parent has already paid tax on the money in question as to his or her income and is simply gifting the same to the child, the parent can claim a refund from the TCS.

Who will be impacted?

Indian students studying abroad, Indian tourists going abroad and Indian investors investing in stocks, bonds, and property abroad will be impacted. It can raise the upfront cost of foreign education and travel, even though the tax can be subsequently claimed back as a refund while filing the income tax return.

Speaking about the impact of the tax to be levied on foreign fund transfers, Vatsaraj further said: “This reduces disposable cashflows, especially if one has low tax liability and has to wait for a year, or more, for a refund. It increases up-front costs of remittances to dependents overseas, e.g. parents sending money to children studying abroad. Tour & travel agents could suffer if people switch to self-bookings instead of buying packages to avoid TCS.”