New TCS rule from 1st October 2023: Tips to reduce TCS on foreign trip

“Get insights into the new Tax Collection at Source (TCS) rules effective from October 1, 2023, impacting foreign trips. Discover tips to reduce TCS on global journeys, understand the Liberalised Remittance Scheme (LRS) changes, and unlock the complexities for international travelers. Learn how TCS applies to various expenses, including education, medical purposes, and overseas tour packages. Gain a comprehensive understanding of the TCS rates, thresholds, and practical tips for minimizing TCS liabilities during foreign travels. Stay informed to navigate the financial landscape of international trips seamlessly.”

The Central Government had initially announced the implementation of new Tax Collection at Source (TCS) rates from 1st July 2023, as per the Union Budget 2023. However, concerns about the unpreparedness of reporting systems and the increased compliance burden led to a postponement of the new TCS rates to 1st October 2023.

In the Union Budget 2023, the tax collection at source (TCS) for foreign remittances under the Liberalised Remittance Scheme (LRS) saw a significant hike from 5% to 20%. This change was meant to apply to various transactions, including international travel and foreign remittances, but not for education expenses abroad or medical reasons.

Unlocking the TCS Mystery for Global Explorers

Tax Collected at Source (TCS) might seem like an enigmatic concept for globetrotters, but understanding it is essential for seamless international journeys. Let’s unravel its intricacies through a different example:

Meet Mr. Anderson, an avid traveler with a penchant for exploring the world’s wonders. His next adventure? A cultural immersion in Japan, with a total cost of Rs. 15 lakhs. However, there’s a twist – TCS applies.

For the first Rs. 7 lakhs of his Japanese escapade, Mr. Anderson faces a 5% TCS rate. As for the remaining Rs. 8 lakhs, a heftier 20% TCS rate is in play. This means he must allocate an extra Rs. 35,000 for the initial portion and Rs. 1,60,000 for the latter, totaling Rs. 1,95,000 in TCS.

Now, to embark on his Japanese odyssey, Mr. Anderson must have Rs. 15 lakhs for the trip, along with the TCS amount of Rs. 1,95,000, amounting to a grand total of Rs. 16.95 lakhs.

This revamped TCS approach significantly influences the financial aspects of international travel, necessitating travelers like Mr. Anderson to be financially prepared for both the adventure and the additional tax.

Revamping the TCS Scenario for International Travel under LRS

The Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) has undergone a significant transformation, impacting the way international travel plans are budgeted. Here’s a fresh perspective on the changes:

Under the LRS, individuals have been able to remit up to $250,000 in a financial year, facilitating global aspirations. However, effective from October 1, there’s a noteworthy adjustment. Now, any overseas outward remittances exceeding Rs. 7 lakh in a financial year, excluding those for medical and educational purposes, will be accompanied by a 20% Tax Collected at Source (TCS) obligation.

This adjustment carries substantial implications for travelers. Consider a scenario: Meet Ms. Mia, an enthusiast for immersive travel experiences. She’s planning an enchanting European getaway with a total cost of Rs. 8.5 lakhs. Under the new regulations, she will encounter a TCS of 20% for the entire amount since it surpasses the Rs. 7 lakh threshold. This results in an additional Rs. 1.7 lakhs in TCS.

For those whose travel dreams fall below the Rs. 7 lakh benchmark, like Mr. Rahul, who’s planning a serene beach retreat for Rs. 6.5 lakhs, the previous 5% TCS rate still applies. This means Mr. Rahul must allocate an extra Rs. 32,500 for TCS.

In essence, these regulatory amendments have made international travel more expensive for those exceeding the Rs. 7 lakh limit. While travelers with more modest plans will continue to experience the previous 5% TCS rate, the revised 20% TCS rate for larger expenditures underscores the importance of comprehensive financial planning when embarking on global adventures.

TCS Rate on on foreign trip and Expenditures

Following chart will explain the position of TCs upto 30^th September 2023 and on or after 1^st October 2023.

Source: (Circular 10/2023 dated 30th June 2023)

Notes:

(i) TCS rate mentioned in column 2 shall continue to apply till 30” September,2023.

(ii) There shall be no TCS on expenditure under LRS under clause (i) of subsection (1G) of section 206C upto Rs 7 lakh, irrespective of purpose.

The table specified above can be explained in terms of paragraphs as under:

i. Educational Purposes: When it comes to foreign remittances for educational purposes, there is no Tax Collection at Source (TCS) applied if the amount being sent is below Rs 7 lakhs. However, if the remittance for education exceeds Rs 7 lakhs, a nominal TCS rate of 0.5% comes into effect. It’s important to note that if the remittance for education is not funded by a loan, a slightly higher TCS rate of 5% is charged. This ensures that larger educational expenses exceeding Rs 7 lakhs are subject to a reasonable TCS.

ii. Medical Purposes: For remittances intended for medical purposes, a 5% TCS is collected if the amount crosses the threshold of Rs 7 lakhs. The Ministry of Finance has clarified that the rate of TCS remains consistent for all travel and ancillary expenses related to both medical and educational treatments. This means that expenses such as hostel fees for a child studying abroad can also be considered as funds remitted for medical purposes.

iii. Foreign Tour: Currently, foreign tour packages are subjected to a 5% TCS without any specific threshold limit. This applies to the entire cost of the tour package. However, starting from October 1, for purchases of overseas tour packages up to Rs 7 lakhs in a financial year, a TCS of 5% will continue to apply. When the total cost of the tour package surpasses Rs 7 lakhs, a higher TCS rate of 20% will be applicable. This significant increase in TCS aims to regulate outward overseas remittances, including various expenses like bank account transfers, forex card loading, foreign exchange, travel expenditures, and business trips. It’s important to note that these regulations do not apply to education and medical expenses remitted through the Liberalised Remittance Scheme (LRS).

iv. Investments: Regarding investments made abroad, such as purchasing stocks, mutual funds, and cryptocurrencies, a TCS rate of 20% will be applicable if the investment amount exceeds Rs 7 lakhs. However, if the investment falls below this threshold limit, no TCS will be imposed. This exemption encourages smaller-scale investments. It’s crucial to understand that if one invests in domestic mutual funds that have exposure to foreign stocks, it will not be considered as remittance under the Liberalised Remittance Scheme (LRS) and, therefore, will not be subject to TCS.

Some important points that one needs to note:

1. Credit Card Transactions Under LRS:

• Credit card transactions are not governed by the Liberalised Remittance Scheme (LRS). Therefore, they do not fall under the purview of TCS. In simpler terms, there will be no Tax Collection at Source (TCS) applied to credit card transactions.
• However, it’s essential to distinguish between payment modes: debit cards and forex cards do come under LRS regulations. Whether TCS is charged on these cards depends on the specific purpose of the transaction.

2. Threshold Applicability and Calculation:

• The threshold limit of Rs 7 lakhs is applicable for an entire financial year. This means that it is calculated annually.
• To determine whether the TCS applies to your transactions, the total amount spent across all authorized banks or dealers during the financial year is considered.
• Therefore, individuals should monitor their cumulative expenses across various transactions and institutions throughout the financial year to ensure compliance with the threshold limits.

3. TCS as a Tax Credit:

• Tax Collection at Source (TCS) is not a standalone tax; instead, it is considered a tax credit. This credit is recorded in Form 26AS, which is an annual statement of the taxpayer’s tax-related information.
• Taxpayers can claim this TCS credit against their tax payable while filing their Income Tax Returns (ITR). Essentially, the TCS amount is deducted from the overall tax liability, reducing the final tax payment.
• Additionally, taxpayers have the option to offset the TCS amount when filing advance taxes. This can help in managing tax liabilities throughout the financial year.

4. Yearly Basis and PAN-Based Threshold:

• The threshold limit of Rs 7 lakhs is reviewed and determined on a yearly basis. This means that it may change from one financial year to another.
• Importantly, the threshold is associated with an individual’s Permanent Account Number (PAN). Regardless of whether Liberalised Remittance Scheme (LRS) transactions have been conducted through different banks, the threshold calculation remains PAN-based. Therefore, it’s crucial for individuals to keep track of their overall remittances and expenses concerning the LRS to ensure compliance with the applicable thresholds.

Useful Tips to reduce TCS on foreign trip?

These suggestions are recommendatory in nature. It helps in limiting one’s total expenses to Rs. 7 lakhs which would be a sensible decision to optimize or limit trip expenses. Here are some suggestions to ensure saving on foreign travels.

1. Prioritize Your Expenditure:

• To optimize TCS, carefully plan your expenses. Begin by allocating your funds for foreign tours and investments, as these categories attract higher TCS rates.
• Once you have utilized the threshold limit for these higher TCS categories, proceed to allocate your funds for education and medical expenses. These categories generally have lower TCS rates.
• Prioritizing your expenditure in this manner can help you manage and potentially reduce the overall TCS burden.

2. Utilize Foreign Websites:

• Transactions conducted through international credit cards while traveling overseas are exempt from TCS. This exemption applies to various expenses, including accommodation, dining, and entertainment.
• Consider booking your foreign tours and making payments through international websites using international credit cards. This strategy allows you to enjoy your trip without incurring additional TCS charges.

3. Credit Cards and TCS:

• Understand the distinction between payment methods when it comes to TCS. Payments made overseas using credit cards remain outside the purview of TCS.
• While credit card transactions are exempt from TCS, keep in mind that payments through debit cards, cash, and wire transfers may still attract TCS based on the purpose of the transaction.
• Be cautious in choosing your payment method to minimize TCS implications.

4. Avoid Packaged Tours:

• Instead of opting for bundled tour packages offered by travel agencies, consider making standalone bookings for essential aspects of your foreign trip. These can include accommodations, airline tickets, and local expenses.
• By booking these components separately, you may reduce the overall TCS liability associated with your foreign tour.

5. Bookings on a Standalone Basis:

• It’s crucial to understand that booking international travel tickets and hotel accommodations independently does not qualify as an ‘Overseas Tour Program Package.’
• This distinction provides travelers with the flexibility to plan their foreign trips without incurring additional TCS charges.

6. International Credit Cards:

• Starting from 1st October, the rules regarding TCS exclude international credit card spending. Transactions made using international credit cards overseas will not be considered part of the Liberalised Remittance Scheme (LRS) and, therefore, will be exempt from TCS.
• This exemption offers travelers the freedom to use international credit cards for various expenses during their foreign trips without worrying about TCS implications.

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..