Foreign Remittance Tax: Is Foreign Remittance Taxable?
The Tax Collection at Source (TCS)Â on international remittances was raised by Finance Minister Nirmala Sitharaman in the 2023 Budget, going from 5% to 20% of the transaction value. This increase, which was implemented on October 1, 2023, is covered by the Liberalized Remittance Scheme (LRS). Reducing tax evasion, especially among wealthy people who utilize international remittances as a way to evade taxes, was the main goal of this action. In this article, we will explain the taxability of foreign remittance in India and how it works.
Table of Contents
What is Foreign Remittance?
Money sent from one person in one country to another (whether related or not) living in another country is referred to as an overseas remittance. There are two kinds of foreign remittances: internal and outward. Outward remittances entail sending money from India to another nation. These remittances may have a personal, business, or investment goal. Banks, special remittance services, and other financial entities can all handle international transfers. Remittances significantly influence the GDP and general economic growth of the country. TCS (tax collected at source) applies to remittances sent and received in India. The central government recently implemented updates to the tax laws pertaining to remittances in India. In the parts that follow, let's discover more about these upgrades.
Foreign Remittance Tax in India
Finance Minister Nirmala Sitharaman declared in the 2023 Budget Address that the Tax Collection at Source (TCS) for overseas remittances would rise from 5% to 20% of the transaction value. Under the Liberalized Remittance Scheme (LRS), the foreign remittance tax hike took effect on October 1, 2023. Targeting affluent people who frequently evade taxes was one of the main motivations for this rise.
Tax implications on Foreign Remittances
The following situations will result in the new tax rate on international money transfers from India:
Packages for international travel
Purchasing products online from a foreign website
Purchasing a foreign asset or financial instrument
Giving money or presents to family members who live overseas
Purchasing foreign company stocks
Buying real estate overseas
Sending money to their overseas bank account as immigrants
Foreign Remittance Tax Exemptions
A maximum of Rs. 7 lakh is free from TCS if you send money overseas to pay for school costs. If the money comes from a loan, TCS fees of 0.5% apply to transactions over this limit. For transactions that surpass the maximum level, 5% TCS applies if these costs are compensated by any other source of income. Also, the TCS rate will be 20% if the sender fails to demonstrate that the funds are being used for educational reasons. Additionally, if the individual sending the money fails to provide their PAN card, the TCS rate would rise. In this scenario, the TCS rate will increase to 5% for foreign money transfers financed by school loans that exceed the upper cap, and to 10% for transfers from regular sources of income.
Exemptions will also apply to overseas transfers up to Rs. 7 lakh for medical costs. Transaction values over this amount are subject to a 0.5% TCS charge.
The following table shows the TCS rates for both new and existing foreign remittances for various transfer types:
Particulars | Old tax rates applicable till September 30, 2023 | - | New tax rates applicable from October 1, 2023 | - |
- | PAN available | PAN unavailable | PAN available | PAN unavailable |
Overseas tours | 5% | 10% | 20% if expenditure exceeds Rs.7 lakh | 40% of Rs. 700,000 in a financial year |
LRS for education and medical treatment | 5% for amounts exceeding Rs.7 lakh in an FY | 10% of remittance amount in excess of INR 700,000 in a financial year | 5% of remittance amount in excess of INR 700,000 in a financial year | 10% of remittance amount in excess of Rs. 700,000 in a financial year |
Foreign education (where a loan is taken) | 0.5% for amounts exceeding Rs.7 lakhs | 5% for amounts exceeding Rs. 7 lakhs. | 0.5% for amounts exceeding Rs. 7 lakh in a financial year | 5% of the amount exceeding Rs. 7 lakhs in a financial year |
LRS – other than education and medical treatment | 5% of remittance amount | 10% of remittance amount | 20% (if the remittance amount exceeds Rs.7 lakhs) | 40% (if the remittance amount exceeds Rs.7 lakhs) |
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To understand the international remittance TCS computation, let's look at an example. Let's say you want to invest Rs.10 lakhs in a foreign asset using a money transfer agency. If the sum exceeds Rs.7 lakhs, or Rs.3 lakhs, a 20% TCS on overseas remittance will be applied. As a result, the money transfer company will take Rs.60,000 (20% of Rs.3 lakhs) from you as TCS, and you will need to pay Rs.10,60,000 to complete your investment.
Latest Updates on the Foreign Remittance Tax
Employees can report TCS payments to their employers by the Budget 2024 update. In this manner, the TCS can be modified by the employers when determining and subtracting TDS from the employee's pay. Employee cash flow will be made easier as a result. The leftover amount will be subtracted from the employee's pay as TDS if the TCS paid is less than the actual tax obligation. It is also possible to request a refund if the TCS paid is greater than the actual tax obligation. Smt. Nirmala Sitharaman, the finance minister, updated the tax rates on overseas remittances in the 2023 budget. According to the most recent information, the Liberalized Remittance Scheme (LRS) will raise the TCS rate from 5% to 20% of the transaction value. Since October 2023, the most recent update has been in force.
Education-related overseas Remittances: Under the liberalized remittance program, overseas remittances up to Rs. 7 lakhs would not be subject to any TCS. A 0.5% TCS applies to any amount over this cap paid using a loan from an approved financial institution. Remittances over Rs. 7 lakh for overseas schooling are also subject to a 5% TCS rate. Any travel expenses for overseas schooling that surpass Rs. 7 lakh will likewise taxed at the same rate.
Medical Expenses:Â A 5% TCS applies to any overseas remittance for medical expenses over Rs. 7 lakhs. Additionally, remittances sent overseas for medical care are subject to a 5% tax.
Travel Packages Abroad:Â TCS is also applied to the total cost of any overseas travel package. In this instance, however, taxes are still assessed even if the total amount spent is less than Rs. 7 lakhs. There would be a TCS of 5% if the tour package is less than Rs. 7 lakhs. Similarly, TCS will be applied at 20% if the tour package's cost is over Rs. 7 lakhs.
International Investments:Â Taxpayers who buy overseas equities, cryptocurrency, or mutual funds pay a 20% TCS if their total investment for the year exceeds Rs. 7 lakhs. Additionally, it covers investments made in Indian mutual funds that trade international stocks; these transactions are not taxable under the LRS and do not qualify as foreign remittances.
Tax on Debit, Credit, and Forex Cards: Credit card payments are exempt from LRS liability. LRS is in charge of handling payments made with debit and forex cards, nevertheless. Additionally, TCS will apply 20% on any payments made with these cards that surpass Rs. 7 lakhs.
Budget 2025 Update
The following are the main TCS updates for Budget 2025:
The Liberalized Remittance Scheme (LRS) threshold limit for TCS remittances has been raised from Rs. 7 lakh to Rs. 10 lakh
If the money comes from a loan from a designated financial institution, there won't be any TCS applied to remittances for educational reasons.
How to Save on Foreign Remittance Tax
Money transfers abroad may become more costly due to India's higher foreign remittance tax rate. You can, however, lower your total taxable income in a few different ways. Banks collect the money when TCS is applicable for any transaction. Therefore, you can modify the total TCS amount based on your tax obligation.
Illustration: Assume you have a relative who resides overseas and send them Rs. 5 lakh. There would be a TCS of Rs. 1 lakh in certain situations. You discover that you owe Rs. 2.5 lakh in taxes when you file your IT returns. In certain situations, you can alter your tax amount with the payable TCS to lower it. As a result, you would owe just Rs. 1.5 lakh in net tax. When a deduction occurs, banks typically offer a TCS certificate. When you file your income tax returns, you can utilize it to seek TCS refunds.
You can now request a refund of the TCS amount withheld if you do not have taxable income. Furthermore, if your total tax burden is less than the TCS amount, you are also responsible for the same. You must note that the blocked TCS amount is not subject to interest.
Conclusion
India's increased levy on foreign remittances might help collect corrective tax payments from people who submit false returns. Finance Secretary T V Somanathan claims that many people send large sums abroad to purchase real estate in other nations. The Indian government, however, is unable to tax them properly because these transactions are not shown on their ITRs. New tax laws have been put into place to stop this.
FAQ
Q1. Is TDS deducted on foreign remittance?
Any amount of TDS shall be subtracted following the payment made to the foreign or non-resident business.
Q2. Are inward remittances taxable in India?
Expenses for living expenses, travel, medical bills, schooling, gifts, and donations to charitable organizations have no tax ramifications. The laws of the country where you start the money transfer will determine this.
Q3. Where to show receipt of foreign remittance in an income tax retun?
Form 15CA is accessible to everyone who submits a declaration form for a foreign remittance that was made outside of India. This form can be submitted online or offline and is filed for each remittance made by the person in charge of it before the money is sent.
Q4. Are outward remittances taxable in India?
Depending on the amount and reason for sending the money outside, resident Indians who make a foreign outward remittance are subject to paying taxes (tax collected at source).
Q5. How much foreign remittance is allowed in India?
For a fiscal year, the Reserve Bank of India (RBI) has set a cap of Rs.2 crore ($2,50,000) on international remittances.
Q6. Who can receive tax-free foreign remittances in India?
The Foreign Exchange Management Act (FEMA) states that sending money to your spouse, parents, siblings, children, or your spouse's linear descendants or ascendants is exempt from taxes. However, there may be tax repercussions for sums over Rs. 50,000 if you send money to someone not in one of these categories.
Q7. What are the documents needed to remit money abroad?
A passport, PAN card, outward remittance form, bank statements, supporting documentation (such as invoices or tickets), and Form A2 are required to send money overseas. Additionally, you must accept the KYC and anti-money laundering policies.
Q8. What is the significance of LRS?
The Reserve Bank of India implemented the liberalized Remittance Scheme (LRS) in 2004. It states that Indian citizens may send up to $250,000 to foreigners during a fiscal year. Both capital and current account transactions fall under this category.
Q9. Would a payment through an overseas credit card be counted in LRS?
Using an international credit card while traveling abroad is not classified as LRS. As a result, until further notice, no TCS will be applied to purchases made with an international credit card while abroad.
Q10. Will investments in foreign mutual funds attract TCS?
No, TCS will not apply to purchases of units in international mutual fund schemes or exchange-traded funds (ETFs). It is because the Liberalized Remittance Scheme does not apply to them.
Q11. How can you transfer money from India to the USA without paying taxes?
A maximum of $1 million can be repatriated by non-resident Indians (NRIs) from India to the United States without incurring any taxes. The rationale is that when NRIs move funds from their NRO to their NRE account, there is no relevant TCS under Section 206C(1G) of the Income Tax Act. This feature enables NRIs to use their NRO accounts to send money back to India, including salaries, dividends, company earnings, rent, and other income. These kinds of transactions, however, will require particular RBI permission.
Q12. How can you transfer money from the USA to India without paying taxes?
Money transfers from the United States to India are not excluded from taxes. Remittances are limited to $14,000 under U.S. law, after which gift taxes will be due.
Q13. How can you avoid 20% TCS on foreign remittances?
The following are practical methods for avoiding the 20% TCS on international transfers:
Making payments under Rs. 7 lakh.Â
Transferring funds for medical care or education.
Using credit cards.
Filing your returns accurately.Â
Q14. Who will get a TCS refund?
An individual may request a refund if they have paid TCS (Tax collected at Source) on remittances
If the total TCS amount is more than their annual tax liability.
If the taxpayer quickly files their income tax return or ITR.
Q15. Can I claim back TCS on foreign remittance?
TCS, which stands for Tax Collected at Source, is relevant to certain international transactions that start in India. When you file your income tax return, you can demand a refund if you paid too much in TCS. You can recover any excess payments you pay by following this guidance, which details the TCS rates, the refund process, and the necessary paperwork.
Q16. Who is exempt from TCS on foreign remittance?
The recent updates state that any remittances exceeding Rs. 7 lakhs would be subject to TCS @20% starting in October 2023. However, TCS does not apply to remittances made for educational or medical purposes.
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