TCS is basically the tax collected by the seller or service provider from the buyer at the time of a sale or provision of service. It is levied to track certain transactions and to ensure tax compliance. The Liberalised Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), permits resident individuals to remit a specified amount of money during a financial year for permissible current or capital account transactions. These transactions include education, medical treatment abroad, purchase of property and investments in foreign stocks.
The various remittances subject to TCS under section 206C include:
Current TCS structure on remittances made under LRS
For education: According to Section 206C(1G) of the Income Tax Act, an authorised dealer is required to collect 0.5% of any amount exceeding Rs 7,00,000 per financial year from individuals making remittances outside India under LRS for educational loans from recognised financial institutions or approved charitable institutions mentioned under Section 80E of the I-T Act. If the educational loan is from an institution not covered under Section 80E or is for other educational purposes, the TCS rate is 5% on any amount exceeding Rs 7,00,000.
For medical: An authorised dealer must collect 5% TCS from individuals who remit amounts exceeding Rs 7,00,000 per financial year outside India under LRS for medical treatment.
For any other purpose: Previously, the TCS rate was 5% on remittances exceeding Rs 7,00,000 in a financial year. After the amendment in the Finance Act, 2023, the rate was increased to 20% without any threshold from July 1, 2023. However, practical difficulties led to a restoration of the Rs 7,00,000 threshold for all categories of LRS payments, through a Ministry of Finance press release dated June 28, 2023. The increased rate came into effect from October 1, 2023, instead of July 1, 2023.
For travel: Following the Ministry of Finance’s press of June 28, 2023, the TCS rate remained at 5% for remittances up to Rs 7,00,000 per individual per financial year for purchase of overseas tour packages. The 20% rate applied only to amounts exceeding Rs 7,00,000 from October 1, 2023, onwards.
| Sr. No. | Nature of Transaction
(Type of Remittance) |
Provisions applicable till Sept 30, 2023 | Provisions applicable w.e.f. Oct 1, 2023 | ||
| Threshold for collection | Rate of TCS | Threshold for collection | Rate of TCS | ||
| LRS for the purpose of educational loan obtained from financial institution mentioned u/s 80E of the IT Act | Up to Rs 7,00,000 p.a. | NIL | Up to Rs 7,00,000 p.a. | NIL | |
| Above Rs 7,00,000 p.a. | 0.5% | Above Rs 7,00,000 p.a. | 0.5% | ||
| LRS for the purpose of education other than mentioned in Sr. No. 1 above and for medical treatment | Up to Rs 7,00,000 p.a. | NIL | Up to Rs 7,00,000 p.a. | NIL | |
| Above Rs 7,00,000 p.a. | 5% | Above Rs 7,00,000 p.a. | 5% | ||
| Any other LRS remittance other than mentioned in Sr. No. 1 and 2 above | Up to Rs 7,00,000 p.a. | NIL | Up to Rs 7,00,000 p.a. | NIL | |
| Above Rs 7,00,000 p.a. | 5% | Above Rs 7,00,000 p.a. | 20% | ||
| Purchase of overseas tour program package | No threshold | 5% | Up to Rs
7,00,000 p.a. |
5% | |
| Above Rs 7,00,000 p.a. | 20% | ||||
Further, it is pertinent to note that the government has decided to postpone the inclusion of international credit card transactions under the LRS. Consequently, such transactions are currently exempt from the provisions of TCS under Section 206C(1G) of the Income Tax Act.
Budget Expectations for Rationalising the TCS rates
A higher TCS rate of 20% effectively blocks a larger portion of funds at the time of remittance. This can create liquidity challenges for taxpayers, especially individuals who rely on regular remittances for personal or business needs.
Lowering the TCS rate to 5% would reduce the amount of funds that get blocked, thereby improving liquidity for taxpayers. This liquidity can be utilised for immediate needs, investments or other productive purposes. It will contribute to increased economic activity.
By reducing the TCS rate, the government may still be able to effectively monitor and manage high-value foreign exchange transactions for tax compliance.
As such, it is expected that Budget 2024 would reduce the rate of LRS considering the practical issues faced by ordinary resident individuals who have to remit funds through this route.
(The author is Practising Chartered Accountant.)