This year the government has made significant changes to TCS on payments made under the Liberalised Remittance Scheme (LRS) and on overseas tour program packages. The finance budget, 2023 had increased TCS rates on payments under LRS and foreign tour packages from 5% to 20% w.e.f. July 1, 2023. However, on June 28, 2023, the Finance Ministry deferred the implementation of higher rates to October 1, 2023.
Under the RBI’s LRS scheme, an individual can remit up to $ 2,50,000 (approximately Rs. 2.06 crore) overseas per year without any prior approval from the RBI. However, the remittances beyond the $2,50,000 or its equivalent in foreign currency would require prior approval from the RBI.
The remittances made under LRS are rising rapidly. If you look at the ratio, you will be astonished by the numbers. The statistics on foreign remittances under LRS over the last few years are shown below:
| Financial Year | Remittance during the year | % Increase |
| 2020-21 | $ 12.68 billion
(around Rs 1.06 lakh crore) |
|
| 2021-22 | $ 19.61 billion
(around Rs 1.59 lakh crore) |
54.65% |
| 2022-23 | $ 27.14 billion
(around Rs 2.25 lakh crore) |
38.40% |
From above you can see that there were around $ 27.14 billion (approx. Rs 2.25 lakh crore) remittances under LRS in the financial year 2022-23 compared to last year which were around to $ 19.61 billion (approx. Rs. 1.59 lakh crore), rise of 38.39%.
The outflow of foreign currency under LRS Scheme is roughly coming to 4.52% of India’s forex reserves of $ 600 billion. The outward remittances increased significantly, which can be attributed to an increase in overseas tours and family spending.
As per the RBI latest data the leisure travel category individually accounted for slightly over $ 12.51 billion, representing half of all outward remittances under the LRS. There has been a significant increase in the overseas travel compared to the previous year when leisure travel accounted for just a quarter of total outward remittances. Day by day, India is spending more and more on overseas tours. During the financial year 2022-23 Indians have spent more than $1 billion monthly on an average on international travelling.
If you look at the monthly remittances under LRS, that is also increasing rapidly. The totaled remittances under LRS in March, 2023 was $ 2.95 billion up from $ 2.1 billion in February, 2023.
As you can see from above that the majority of all outward remittances under LRS were mainly for international travel. The next highest expenditure was the maintenance of close relatives residing outside India, at $ 630 million, followed by investment in debt and equity, at $ 232 million this March and overseas education as per the data published by the RBI.
Over the past two years, the outward remittances under the LRS have more than doubled, reaching $ 27.14 billion. Increase in LRS outflow may have adverse macroeconomic consequences, necessitating intervention and therefore the government is uneasy about this significant rise, suspecting that the actual figures could be even higher due to credit card transactions. The government is alarmed by seeing the statistics of huge jump in credit card spend for expensive luxury travel as use of an international credit card for making payments while on a visit abroad is not covered under the LRS and hence was not subject to TCS.
Therefore, in order to reduce the outgo of foreign currency, the government has proposed to bring the credit cards under the purview TCS and simultaneously increase the rate of TCS.
Section 206C(1G) of the Income-tax Act, 1961 provides for TCS on
(i) foreign remittance through the Liberalised Remittance Scheme (LRS) and
(ii) sale of overseas tour program package.
Through the Finance Act 2023, the amendments were proposed and carried out in sub-section (1G) of section 206C of the Act. These amendments, inter alia, increased the rate of TCS from 5% to 20% for remittance under LRS as well as for purchase of overseas tour program package and removed the threshold of Rs. 7 lakh for triggering TCS on LRS except when the remittance is for education or medical purpose. These amendments were to take effect from 1st July 2023.
However, numerous suggestions, representations and comments were received by the government about the practical difficulties by removal of the threshold for LRS payments other than for education and medical treatment which has been carefully considered by them. Further, during their meetings with the RBl, Banks and Card networks, some financial institutions have requested for more time to modify their current systems to implement the amendment of the provision of TCS on credit card transactions.
So, in order to give adequate time to Banks and Card networks to put in place requisite system, the Government has decided to postpone the implementation of provision to include the credit card transaction within the purview of LRS. This would mean that transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS. They have also restored the threshold of Rs. 7 Lakh per financial year per individual for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose. (Circular No. 10 of 2023 dated 30th June, 2023)
Thus, for first Rs. 7 Lakh remittance under LRS there shall be no TCS. However, the remittances beyond Rs. 7 Lakh threshold, TCS shall be following:
a. 0.5% (if remittance for education is financed by education loan);
b. 5% (in case of remittance for education other than above / medical treatment);
c. 20% for others.
For purchase of overseas tour program package the TCS shall continue to apply at the rate of 5% for the first Rs. 7 lakhs per individual per annum; the 20% rate will only apply for expenditure above this limit.
Rate of TCS applicable from 1st October, 2023: The increase in TCS rates; which were to come into effect from 1st July, 2023 shall now come into effect from 1st October, 2023 with the modification. Till 30th September, 2023, earlier rates (prior to amendment by the Finance Act 2023) shall continue to apply.
| Nature of payment | Earlier rate up to 30th September, 2023 | New rate w.e.f. 1st October 2023 | |
| A | Rate of TCS on foreign remittances under LRS: | ||
| A.1 | Remittance for the purpose of Education* | ||
| Ø Remittance out is a loan obtained from any financial institution as defined in section 80E | Nil up to Rs. 7 lakh
0.5% above Rs. 7 Lakh |
Nil up to Rs. 7 lakh
0.5% above Rs. 7 Lakh |
|
| Ø Other than above
i.e. when the remittance is not out of loan from any financial institution as defined in section 80E |
Nil up to Rs. 7 lakh
5% above Rs. 7 Lakh |
Nil up to Rs. 7 lakh
5% above Rs. 7 Lakh |
|
| A.2 | Remittance for the purpose of Medical Treatment* | ||
| Ø Remittance for Medical treatment | Nil up to Rs. 7 lakh
5% above Rs. 7 Lakh |
Nil up to Rs. 7 lakh
5% above Rs. 7 Lakh |
|
| A.3 | Remittance for any other purpose | ||
| Ø Remittance for any other purposes | Nil up to Rs. 7 lakh
5% above Rs. 7 Lakh |
Nil up to Rs. 7 lakh
20% above Rs. 7 Lakh |
|
| B | Rate of TCS on purchase of overseas tour package*: | ||
| Ø Purchase of Overseas tour program package | 5% (without threshold) | 5% till Rs. 7 Lakh
20% thereafter |
|
Note:
There shall be no TCS on expenditures under LRS for the first Rs. 7 lakh, irrespective of purpose. However, it has been clarified by the government that in case where the payment for of purchase of overseas tour program is classified under LRS, the TCS provision for remittance under LRS will not apply but purchase of overseas tour program package shall apply.
*What all expenses are included in the remittance for the purpose of Education and Medical?
I. Education Purpose:
As per the clarification issued by the RBI, the remittance for purpose of education shall include following: –
i. remittance for purchase of tickets of the person undertaking study overseas for commuting between lndia and the overseas destination;
ii. the tuition and other fees to be paid to educational institute; and
iii. other ancillary expenses required for undertaking such education like day to day expenses, food, accommodation and local transport etc.
It may be noted that code S0305 (under the Purpose Group Name “Travel”), in RBI master direction for LRS, pertains to travel for education (including fees, hostel expenses, etc). Also, as stated by the CBDT in the Circular 10 of 2023 dated 30th June, 2023 that as per BPM6, A.P. (DIR Series) Circular no 50, dated 11 Feb 2016 this code covers education related services such as tuition, food, accommodation, local transport and health services acquired by resident students while residing overseas.
In addition to that, code S1107 (under the Purpose Group Name “Personal, Cultural & Recreational services”) covers transactions for education (e.g. fees for correspondence courses abroad) where the person receiving education does not travel overseas.
TCS provision for purpose of education would apply only when the remittance is under code S0305 or under S1107.
II. Medical Purpose:
As per the clarification by the RBl, remittance for the purposes of medical treatment shall include: –
i. remittance for purchase of tickets of the person to be treated medically overseas (and his attendant) for commuting between lndia and the overseas destination;
ii. his medical expense; and
iii. other ancillary expenses relating to medical treatment like day to day expenses, healthcare, food, accommodation and local transport transactions etc.
It may be noted that code S0304 (under the Purpose Group Name “Travel”), in RBI master direction for LRS, pertains to travel for medical treatment. Also, as stated by the CBDT in the Circular 10 of 2023 dated 30th June, 2023 that as per BPM6, A.P. (DlR Series) Circular no 50, dated 11 Feb 2016 this code covers the transactions which are related to health services acquired by residents travelling abroad for medical reasons, which includes medical services, other healthcare, food, accommodation and local transport transactions.
ln addition to that, code S1108 (under the Purpose Group Name “Personal, Cultural & Recreational services”) covers transactions for health services rendered remotely or onsite (that is no travel by service recipient is involved). This cover services from hospitals, doctors, nurses, paramedical and similar services, etc.
TCS provision for purpose of medical treatment would apply only when the remittance is under code S0304 or under code S1108.
III. Overseas Tour Package:
The term ‘overseas tour program package’ is defined as to mean any tour package which offers visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto.
It is clarified that purchase of only international travel ticket or purchase of only hotel accommodation, by in itself is not covered within the definition of ‘overseas tour program package’. To qualify as ‘overseas tour program package’, the package should include at least two of the followings: –
i. international travel ticket,
ii. hotel accommodation (with or without food) / boarding / lodging,
iii. any other expenditure of similar nature or in relation thereto.
What to do in order to save the TCS on foreign remittances?
The following are some suggestions for reducing TCS on foreign remittances. This is merely the author’s opinion, and it should not be construed as a legal provision.
i. Book and Pay from Different Name: The TCS threshold limit of Rs. 7 lacs is qua remitter, which means that if the remittance under LRS or for the overseas tour program per person surpasses Rs. 7 lacs, TCS is levied at the stipulated rate. As a result, if the remittance under one person’s name does not exceed Rs. 7 lacs, TCS at a reduced rate or no TCS will be leviable (depending on the purpose of the transfer).
ii. Avoid Bundled Tour Package: The provisions of TCS are applicable only on purchase of overseas tour program packages i.e. only when bundled services bought. It is not applicable when you are booking international travel tickets and hotel accommodations independently. It does not qualify as an ‘Overseas Tour Program Package’. So, instead of opting for bundled tour packages offered by travel agencies, consider making standalone bookings for overseas accommodation, travel tickets, and other essential aspects of your foreign trip. By booking these components separately, you may reduce the overall TCS liability associated with your foreign tour.
iii. Book from Foreign Websites: Consider booking your overseas tours and making payments through international websites using international credit cards. The transactions conducted through international credit cards while traveling overseas are as of now outside the purview of TCS. This exemption applies to various expenses, including accommodation, dining, and entertainment. It will help travellers to enjoy the trip without blocking your cash flow. This exemption offers travellers the freedom to use international credit cards for various expenses during their foreign trips without worrying about TCS implications.
iv. Use Credit Card for payment: There’s a distinction in the applicability of TCS between the payment methods. The payments made overseas using credit cards remain outside the purview of TCS. However, keep in mind that only credit card transactions are outside the purview of TCS whereas payments through debit cards, cash, and wire transfers will still attract the TCS based on the purpose of the transaction.
v. Prioritize Your Expenditure: To minimise the blocking of your cash, carefully plan your expenses. Start by allocating your funds for foreign tours and investments, as these categories attract higher TCS rates once the threshold is crossed. Once the threshold limit for these higher TCS categories is utilized, you can proceed to allocate your funds for education and medical expenses as these categories generally have lower TCS rates. Prioritizing your expenditure in this manner can help you manage and potentially reduce the overall TCS burden.
It’s crucial to remember that while TCS is not a tax by itself, it is essential to keep track of it and claim it against the tax payable while filing your Income Tax Return (ITR). By following these tips and understanding the new TCS rules, you can effectively manage your finances during foreign trips and minimize your TCS burden.
What is Liberalized Remittance Scheme?
The remittances by individuals up to $ 2,50,000 for following purposes are covered under liberalized remittance scheme:
i. Private visits to any country (except Nepal and Bhutan)
ii. Gift or donation
iii. Going abroad for employment
iv. Emigration
v. Maintenance of close relatives abroad
vi. Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment / check-up.
vii. Expenses in connection with medical treatment abroad
viii. Studies Abroad
ix. Any other Current account transaction
Current account transactions means transaction other than capital account transactions and include:
i. payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business
ii. payments due as interest on loans and as net income from investments,
iii. remittances for living expenses of parents, spouse and children residing abroad, and
iv. expenses in connection with foreign travel, education and medical care of parents, spouse and children.
Author’s view: Previously, the TCS was primarily introduced to track financial transactions such as incomes and expenditures. The fundamental purpose of introducing TCS was to ensure the transparency in financial transactions and enable the department to assess the accuracy of income declarations. However, by increasing the rate to 20%, it appears that it has become a tool to replenish their cash flow for limited period of time. Instead of increasing the rate, the government should devise the alternative means to discourage the payments in foreign currency.
*****
The statistics as mentioned in this article has been collated from various websites. In case you have any doubts or queries in relation to above topic, feel free to reach out to me at [email protected].
Author Bio
Very well explained. Definitely bookmarking this article.