Watch Your Tax On Money Sending Abroad
Sajjad Bazaz
Income tax sops announced in the Union Budget 2025 have raised enthusiasm among the general public, especially the salaried class. Among other things, the proposal to rationalise Tax Collection at Source (TCS) is also exciting.
Tax Collection at Source is an advance tax which is collected at the time of transactions including sale of goods and foreign remittances. To be precise, when you remit the money overseas and it crosses a threshold, the remitter is meant to pay an advance tax to the financial institution that facilitated the transaction such as bank. Notably, this is not an extra tax but like an advance tax which can be adjusted against the tax liability at the time of filing of return.
Why Tax on Sending Money Abroad?
The provision of the TCS was made effective from October 01, 2020. But the exemption limit was made applicable for the full financial year, i.e., 01 April 2020 till 31 March 2021. It started with 5% and was increased to 20% from July, 2023 increase.
There could be many reasons for the government to impose TCS on foreign remittances. Of course, it will increase the flow of revenue for the government. However, the move also seems to bring those into the tax net who have been evading tax liability by hiding their actual income.
Here, PC Mody, former Chairman of the Central Board of Direct Taxes (CBDT), is worth quoting as he said the TCS for remittances including education was introduced after some study was made and the government came across cases where the return profile of remittances did not match with the remittances made. “So it is just a question of cataloguing the remittances and matching returns,” he said.
Even the move will discourage people from traveling abroad and make them spend money within the country. Of course, there may be many who have been transferring funds abroad and do not file income tax returns. People remitting large sums ideally should be in the income tax bracket and paying income tax. There are also some segments that apparently have no business to fall in the TCS trap and don’t file income tax returns, but they could be heading for a fancy tour at regular intervals with the whole family. The TCS has netted this segment and makes them pay if their remittance is in excess of specified limit.
Pre-Budget 2025 Scenario:
Notably, in the last Union Budget 2023, TCS for international transactions was made costly. The change in the tax structure (percentage of tax) made sending of money abroad costly. Any one sending money abroad to a person, travelling abroad, buying assets (spending money on shopping) or investing abroad was made to shelve out more tax on such transactions as the TCS was hiked up to 20% from 5% with effective from July 1, 2023 onwards. However, the remittances sent abroad for the purpose of education or medical treatment were kept unchanged.
Currently, there are three different rates: 0.5 percent, 5 percent and 20 percent. When the foreign remittances under the LRS cross Rs.7 lakh, TCS rate is 5 percent in case of education or medical treatment, and 20 percent for other purposes. When the education is financed through an education loan, the tax rate stands at 0.5 percent.
Post-Budget 2025 Scenario:
The Budget 2025 proposal envisages to raise the threshold to collect TCS on remittances under RBI’s liberalised remittance scheme (LRS) from Rs.7 lakh to Rs.10 lakh. This means when you transfer an amount above Rs.10 lakh, you have to pay an advance tax in form of TCS which is collected by the bank to deposit with the tax department.
The major relief has been extended to the students who are studying abroad. The budget proposes to remove TCS on remittances for education purposes, where such remittance is out of a loan taken from a specified financial institution. Besides, to prevent compliance difficulties, the TCS on sale of goods would be omitted.
Credit Card Spending:
Credit card spending in foreign currency under the newly amended Foreign Exchange Management Act (FEMA), all international credit card transactions made in foreign currency fall under the Liberalised Remittance Scheme (LRS) with effect from October 2023. the TCS is 20 percent on expenditure through international credit card while being overseas.
The finance ministry had amended the rules to bring international credit card spending outside India under the LRS. Explaining the need behind this move, the ministry said, “Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000. The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.”
Notably, Rule 7 of the FEM(CAT) Rules, 2000 had exempted the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.
Claiming TCS Refund:
When the total tax liability is more than the tax deposited, one has to deposit the balance tax with the tax department a the time of filing ITR, and when the tax liability falls short — taxpayer is entitled to receive a tax refund.
Income tax rules provide that TCS can be claimed as an income tax refund, or a credit can be availed when filing the income tax return or for computing your advance taxes. The bank provides a TCS certificate at the time of deduction, which can be used while claiming TCS in the Income Tax Return (ITR) filing. precisely, TCS is refundable.
Conclusion:
The scenario around tax reformation merits a focused attention of common citizens as they are left with no option but to plan their tax savings meticulously. Here, the role of tax consultants cannot be overlooked as tax planning is the most complex job and is not everybody’s cup of tea. And the most important thing to do even for a common man is to keep track of the mechanism of taxes. Otherwise ignorance can prove costly.
(The author is Editor-in-Chief Straight Talk Communications. He is former Head of Corporate Communications & CSR Department and Internal Communications & Knowledge Management Department, J&K Bank)
