TCS Foreign Remittances LRS

Am I supposed to pay Tax on Foreign Remittances?

Am I supposed to pay tax on my Forex transaction? What is the maximum permissible limit of the amount in Foreign Remittances? Am I required to report all my transactions to RBI?….

All these are the common questions that come to every individual who is involved in a foreign exchange transaction. To answer these questions, firstly we have to understand the concept of LRS – Liberalized Remittance Scheme of Reserve Bank of India. 

LRS – Liberalized Remittance Scheme

The LRS scheme allows a resident individual to transact up to USD 2,50,000 (approximately Rs. 1,85,37,138, exchange rate as of 18/11/2020) without prior permission of the RBI for the financial year of 1st April to 31st March. (The Reserve Bank of India is the authority which amends the permissible limit from time to time.)

Graph showing the LRS limit from 2004 to 2015 Tax on Foreign Remittances
Graph showing the LRS threshold limit from 2004 to 2015

What transaction Individual can do under Liberalized Remittance Scheme (LRS)?

A resident Individual is permitted to undertake any Current or Capital account transaction or combination of both.

Permissible capital account transaction includes; opening foreign currency account abroad with a bank, purchase of property abroad, making an investment in shares by purchasing listed and unlisted stocks, extending loans to NRI, and setting up of joint venture or wholly-owned subsidiary subjected to conditions laid down by the Foreign Exchange Management Act.

Permissible current account transaction includes; Private visit, Gift/ donations, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, education abroad, facility to grant loan in rupee to NRI/PIO close relatives under the scheme and other current account transactions under permissible under the FEMA act.

What is the tax applicable on Foreign Remittances or Forex Transactions?

Section 206C (1G) of Income-tax Act, 1961 imposes the tax on Forex remittances or forex transactions if the amount is above a specific limit. The limits are subject to change from time to time.

The present rules are effective from 1st October 2020 in accordance with Finance bill, 2020.  As per the Income-tax Act, up to Rs. 7 lakhs per financial year exempted from tax liability. The tax on the amount above Rs. 7 lakhs is levied and the individual has to pay Tax on TCS basis, Tax collection at source.  

In the case of foreign tour packages, Travel Company will collect TCS irrespective of the cost of travel and the TCS applies to individuals on the entire amount of remittances.

Presently the tax rate applicable is 5% on over and above Rs. 7 lakhs and 0.5% for education loan transactions. An individual who fails to provide Permanent Account Number, TCS is applicable at 10%. In some cases, GST is applicable for currency conversion and on remittance charges, which is not considered for TCS collection. Individuals can file income tax to avail tax refund while filing Income tax or adjust with overall tax liability.

Examples on applicability of TCS & LRS :

Transaction 1:  Mr. X makes a transaction of Rs. 5,00,000 on foreign exchange remittance on 24th October 2020.

Transaction 2:  Mr. Y makes a transaction of Rs. 10,00,000 on loan repayment from foreign financial institutions on 28th March 2020.

Transaction 3: Mr. A makes a payment of Rs. 22,00,000 towards pursuing education through a loan obtained from financial institutions on 1st November 2020.

Transaction 4:  Mr. B remitted the amount towards a gift to his relative who stays in the UK amount of Rs. 3,00,000 on 1st January 2021.

Transaction 5:  Mr. X purchased shares worth Rs. 14,00,000 in the USA on 2nd November 2020.

Transaction 6:  Mr. X remitted the amount of Rs. 5,00,000 as a loan to NRI who stay in San Francisco on 15th November 2020.

Transaction 7:  Mr. B remitted the amount of Rs. 12,00,000 to his friend who is staying in the USA as a loan dated 21st January 2020.

Transaction 8: Mr. P purchased a tour package from RV Tours services amount of Rs. 2,00,000 on 1st February 2020.

* The above transactions are applicable for the financial year 2020-21 (1st April 2020 to 31st March 2021)

Name of the Individual Transaction details TCS applicability Tax Amount
 Mr. X Rs. 5,00,000 Remittance Nil (Up to 7 lks no tax)  00
Mr. Y  Rs. 10,00,000 Loan repayment 28th March 2020 Not applicable as the transaction date is not in the Financial year 00
Mr. A Rs. 22,00,000 Education loan 0.5% TCS on Rs. 15,00,000 ( 22,00,000-7,00,000) Rs. 7,500 
Mr. B Rs. 3,00,000 Gift to relatives Nil ( Upto 7 lks no tax) 00
Mr. X Rs. 14,00,000 purchase of shares Rs. 5,00,000 + Rs. 14,00,000 = Rs. 19,00,000 Rs. 12,00,000 ( 19,00,000-7,00,000) 5% on Rs. 12,00,000 Rs. 60,000
Mr. X Rs. 5,00,000 Loan to NRI Rs. 5,00,000 (earlier transaction) +Rs. 14,00,000 (earlier transaction) +Rs. 5,00,000 = Rs. 24,00,000.
Since the amount already paid on Rs.12,00,000 remaining 5% on Rs. 5,00,000 TCS applicable
Rs. 25,000 Total Taxable by Mr. X  is Rs. 60,000 + Rs. 25,000 = Rs. 85,000.
Mr. B Rs. 12,00,000 remitted as a loan to a friend Rs. 3,00,000 (earlier transaction) + Rs. 12,00,000 = Rs. 15,00,000.
Rs. 8,00,000 (Rs. 15,00,000-7,00,000)
Rs. 40,000
Mr. P Rs. 2,00,000 tour package Rs. 2,00,000 ( no minimum threshold applicable) Rs. 10,000 in case PAN is provided Rs. 20,000 in case PAN is not provided (10%)
Table showing the TCS calculation (examples) for the financial year 2020-21.
Conclusion :

To put in a nut-shell;

  • Under the Liberalised Remittance Scheme of Reserve Bank of India, the resident individuals are allowed to transact up to USD 2,50,000 for a given financial year from 1st April to 31st March. 
  • A resident individual can undertake Current and Capital account transactions or combinations as prescribed by the Reserve Bank of India and guidelines of the Foreign Exchange Management Act.
  • Effective from 1st October 2020 up to Rs. 7,00,000 per financial year foreign exchange transactions are exempted from tax liability.  Over and above Rs. 7,00,000 individuals levied TCS-Tax collected at source at 5% and 0.5% on an education loan transaction. 
  • Individuals can file Income tax to avail refund or adjust with overall tax liability.

This is a guest post by Prof.Sudindra V R of ISME (International School of Management Excellence).

About the Author:

Sudindra v r ISME

Sudindra is a Management graduate having 15+ years of experience, with a specialization in Finance and Marketing and also completed CFP-Certified Financial Planner from Financial Planning Standards Board,Mumbai. His area of interest in Financial services, Investment Banking, Financial Literacy and International Finance.

He has attended many workshops, National & International Conferences and seminars. He has worked with Ocwen Financial Solutions, E4E Financial Services, HSBC Bank, MZone Financial services, AMC Engineering College prior to being associated with ISME.

(References : The Economic Times, & RBI Notification) (Post first published on :03-December-2020)

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