TCS on Foreign Remittance: What You Should Know

Whether you are planning to splurge on a big international vacation or buy that coveted designer bag, there might be a surprise tax waiting to take a bite out of your hard-earned cash. This hidden tax is called Tax Collected at Source (TCS). Since the 2023 Union Budget, a whopping 20% TCS applies to certain foreign transactions under the Liberalised Remittance Scheme (LRS). 

So next time you make a big foreign payment, expect to pay extra for TCS which is collected by the receiving bank or business.

TCS Meaning: How is TCS different from TDS?

Given the lack of discussion on TCS, it's easy to mix it up with TDS. Let's clear the air and distinguish between the two.

TDS is the tax deducted by the payer while making certain payments. The most common instance is the TDS deducted by companies while paying salaries.  TCS on the other hand, is the tax collected by the seller on the sale of certain goods. For example, when you buy alcoholic liquor, the price includes 1% TCS. In a nutshell, TDS is deducted by the payer while TCS is collected by the seller. 

Let's dive deeper to understand everything about TCS on foreign remittance so  that you can minimise your tax burden.

Applicability of Tax Collected at Source (TCS) on Foreign Remittance

Online internal shopping has become extremely popular, making it easier to purchase from global brands. However, remember online shopping from international shopping websites above Rs. 7 lakhs attracts TCS because it's considered foreign remittance.

Other transactions that involve sending money abroad for different purposes, such as purchasing items, foreign investment, tuition fees, and foreign travel also come under foreign remittance, and TCS is applicable on such activities.

Tax collected at source (TCS) applies when you send over INR 7 lakhs abroad in a financial year. For instance, if you are  buying foreign company stocks worth INR 9 lakhs, you need to pay 20% TCS on 2 lakh (9 lakhs - 7 lakhs).

Prior to 2023, TCS on foreign remittances under the LRS was 5%. However, in the 2023 budget, the new TCS rate was increased from 5% to 20% to boost tax revenue and promote domestic spending. 

The TCS on foreign remittance for medical and educational expenses stands at 5% if the amount remitted exceeds INR 7 lakh.  However, if medical and educational expenses are funded by a financial institution, 0.5% TCS will be applicable.

The new TCS rates became applicable from October 1, 2023.

Here are the activities on which TCS will be applicable: 

1. Personal Activities 

2. Investment Activities 

3. Real Estate Investment

4. Medical and Educational Expenses 

5. Travel Activities

Here is the breakdown for new and old TCS rates on different types of foreign remittances. Note that the new TCS rates will be applicable from 1st September 2023. 

Calculation and Rates of TCS on Foreign Remittance Post Budget 2023

Let's try to understand the applicability of TCS via certain examples. 

Example 1:

Consider buying stocks worth INR. 10 lakh in a US company. Now, since the amount remitted is greater than INR 7 lakhs, 20% TCS will be applicable. 

As mentioned, TCS will be collected on the amount exceeding INR 7 lakhs, which in this case is  INR 10 Lakhs - INR. 7 lakhs, which comes to INR 3 Lakhs. As mandated, 20% TCS will be collected from INR 3 Lakhs which equals to INR Rs. 60,000

So if you are investing INR 10 lakhs in US stocks, you are effectively investing only INR 9,40,000 as the rest INR 60,000 will be collected as TCS. 

Example 2:

Now consider that you are sending the same INR 10 lakh to your sister studying in the US to pay her fee. Since this amount is being remitted for educational purposes, instead of 20%, 5% TCS will be applicable on the amount exceeding Rs. 7 lakh. 

Therefore, the total taxable amount  will stay at INR 3 lakhs (Rs. 10 Lakhs - Rs. 7 lakhs)

However this time, instead of 20%, 5% TCS will be collected bringing the total amount to INR 15,000 (5% of INR 3 lakhs). 

However, note that if you are unable to prove that the money sent abroad is for educational or medical purposes, 20% will be applicable.

Example 3:

Let's say the total remittance for the year adds up to INR 8 lakh, and this amount is financed through an education loan taken from a bank approved by the Reserve Bank of India (RBI). 

In this scenario, a TCS of 0.5% would be applicable only on the amount exceeding the threshold of INR 7 lakh. 

So, in this case, TCS would be charged on INR 1 lakh (INR 8 lakh - INR 7 lakh) at a rate of 0.5%, which translates to INR 500 (0.5% of INR 1 lakh)

Strategies to Minimise TCS Liability

While Tax Collected at Source (TCS) might seem like an extra burden, you can consider it as an advance payment towards your income tax. Here's how to minimise its impact:

#1: Adjust the TCS Against Your Final Tax Liability

If you have no or low tax liability, you can get the TCS on foreign remittance as refund while filing your ITR. Make sure to keep the following documents handy:

For example, let's say you purchase a foreign tour package worth Rs. 9 lakh. With the new regulations, a 20% Tax Collected at Source (TCS) applies to the amount exceeding Rs. 7 lakhs, totaling Rs. 40,000. If your total income tax liability for the year is INR 1 lakh, you can offset the Rs. 40,000 collected as TCS against your liability, reducing the total tax payable to Rs. 60,000. 

While filing your income tax return, you will find a section dedicated to claiming deductions for taxes paid. Under the appropriate section, include the TCS amount you paid for the foreign tour package. Double-check to ensure the TCS amount claimed matches the amount reflected in your TCS receipt.

Here’s a quick read to understand how to file your income tax return.

#2: Make Foreign Investments Through LLPs

If you're making foreign investments, consider doing so through a Limited Liability Partnership (LLP), as these entities are exempt from TCS. LLPs are permitted to invest abroad via two modes: overseas direct investments (ODI) and overseas portfolio investments (OPI). In case of overseas portfolio investments, the 20% TCS rate doesn’t apply. 

#3: Use International Credit Card

TCS is not applicable to payments made through international credit cards while overseas. Therefore, you can make international credit card payments while travelling abroad to reduce TCS liability.

Visa and Mastercard are the two major payment networks that offer international credit cards through various Indian banks. Many banks like SBI Cards, HDFC Bank, ICICI Bank, and Axis Bank provide credit cards powered by Visa or Mastercard that can be used internationally.

Additionally, American Express (Amex) is another network offering international credit cards in India. You can find Amex cards through banks like IndusInd Bank and YES Bank.

Remember, if your total foreign remittances (excluding travel packages) are less than Rs 7 lakh in a year, TCS doesn't apply. Each family member can use their own Rs 7 lakh limit, so plan your foreign remittances accordingly. 

Also, as we have mentioned, educational and medical expenses abroad are exempt from the 20% TCS rule. Keep the relevant documents handy to claim this benefit.

Parting Words

The introduction of TCS on foreign remittance addresses two crucial concerns: tax revenue and domestic spending. It's imperative to clarify that TCS isn't an additional tax but rather a mechanism ensuring financial transparency and compliance, particularly in cross-border payments.

Here at Skydo, we're committed to streamlining international payments while adhering to compliance and transparency standards. With Skydo, receive international payments swiftly, free from forex or conversion fees,  in a secure and compliant manner.

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