 "How to avoid TCS when your child goes abroad for higher education")
How much can parents send overseas in a given year?
The Liberalised Remittance Scheme (LRS) allows parents to transfer money to their children studying abroad to meet various expenses related to the course. The LRS prescribes a monetary threshold of $ 250,000 up to which parents can send money abroad during a financial year, i.e period 1 April to 31 March. In case the amount to be remitted is above this limit, RBI’s permission would be required.
How does TCS apply for education abroad?
Parents can send money abroad for their child's education under the Liberalised Remittance Scheme (LRS). Normally, there's no exemption limit for LRS payments. However, there's an exception for education-related payments. You can send up to Rs 7 lakh per year without being subject to TCS. If the amount exceeds Rs 7 lakh, a reduced TCS rate of 5 per cent is applied. If the funds are remitted through an education loan, the TCS rate drops even further to 0.5 per cent.
Point to note: TCS at the rate of 0.5 or 5 per cent would still be applicable even if the funds (excess of Rs 7 lakh) are remitted before July 1, 2023.
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Example one: Parents sending Rs 30,000 for education to their daughter studying abroad every month will not attract the TCS rule as the total amount remitted in a year is Rs 3.6 lakh, less than the threshold limit of Rs 7 lakh in a year. However, if the threshold limit is crossed, it will still attract TCS at 5 per cent and not 20 per cent.
Example two: You want to send Rs 1 lakh monthly for your child's education-related expenditure abroad. The total amount remitted in a year is Rs 12 lakh, which does exceed the threshold limit of Rs 7 lakh a year. While Rs 7 lakh will not attract any TCS, the remaining Rs 5 lakh will attract TCS at 5 per cent.
Which educational expenses qualify for a lower TCS rate
These include tuition, dormitory, lab, exam, books, and stationery fees. Additionally, living expenses, such as food and lodging, can be claimed as educational expenses if a connection between these expenses and education can be established.
"The scope of the above benefit/ exemption is wide enough to cover remittances made by a person for his/her own education or by others, like parents paying for their children's education, etc. Any fee paid to educational institutions towards tuition fee, hostel accommodation and other living expenses also may be eligible for the benefit. Also, the above should be available for all possible modes of remittance, like wire transfers, card payments, travelers' cheque, purchase of foreign currency, etc," said S. Vasudevan, Executive Partner at Lakshmikumaran & Sridharan Attorneys.
What if the student is not living on the campus?
If the student stays in the accommodation provided by the university, it will automatically be considered an educational expense, but if the student resides in third-party-provided housing, the sender of funds must establish a connection between the expenses and education to claim them as educational expenses.
Are additional living expenses also covered under the 5 per cent TCS?
For TCS on remittance for travel and incidental expenses related to education and medical treatment, the rates of TCS as applicable to remittances for education and medical treatment, respectively, shall apply, the finance ministry has clarified.
"However, on-ground challenges to monitor the end usage of such funds will have to be ensured. It should not happen that parents/ families use the camouflage of incidental expenses on education to circumvent other remittance purposes, attracting a higher TCS rate of 20 per cent. A detailed clarification is awaited to this effect. Other incidental expenses with no nexus to education shall attract TCS at the rate of 20 per cent," said Keshav Singhania, head of Private Client Singhania & Co
What documentation proof is required to cover education and living expenses?
Banks are responsible for collecting TCS, and it's up to them to interpret what qualifies as "education."
" While transferring the funds abroad, correct remittance code should be used, to support that the expenses are being remitted for educational purposes. The remitter needs to submit a Form A2 cum LRS declaration to the bank. In this declaration, the remitter mentions the objective of the payment, such as tuition fees, lodging/ travel expense, etc. The remitter may also mention the student's name, student ID number, and foreign university name etc. on this form, to justify the educational purposes," said Akhil Chandna, Partner, Tax, Grant Thornton Bharat.
Ankit Jain, Partner, Ved Jain & Associates, said it would be prudent to have the following documentation while making the remittance:
1. College admission/offer letter mentioning the student's name.
2. Details of the programme
3. Fee invoice, including the bank details of the college for remittance.
4. Programme prospectus.
5. Proof of relationship between the remitter and the student.
While not always required, some banks might also ask for Form 15CA/CB during such remittances.
If you are opting for an education loan, you have to submit the following documents to claim a lower TCS of 0.5 per cent
1. Education loan sanction letter with the student's name and parent who is the co-borrower
2. Declaration on the LRS application from the client that the source is from the loan
3. Bank statement showing the source of funds as unutilised disbursed Education loan by a financial entity
"Banks may insist on submission of proof regarding the end use of the funds. For instance, the banks may ask for documentary proof of admission given by educational institutions as well as estimate of fee and other expenses. The banks may also insist upon copies of invoices, receipts, rent agreements, etc. to satisfy themselves about the end use of the funds," said S. Vasudevan.
How can one send more than Rs 7 lakh to fund living expenses while children are studying abroad without attracting 20 per cent TCS?
Since each resident individual gets their own LRS limits, parents/ families may distribute the remittance to be sent to the student abroad requiring funds in excess of Rs 7 lakh by spreading the remittance across various family members in a manner which ensures that threshold limit for each individual is not breached. "The same shall also not attract adverse tax implications since the donor and donee would be classified as relatives basis the definition provided in Income Tax Act," said Keshav Singhania, Head – Private Client, Singhania & Co.
In other words, parents should make the most out of the Rs 7 lakh exemption limit. Each parent can remit up to Rs 7 lakh separately, allowing you to send up to Rs 14 lakh in total without incurring TCS. Grandparents can also help with remittances.
"For example, if Aryan needs hostel fees amounting to Rs 13 lakh, then parents can split the amount in half and can send the same from two accounts one from their account and the remaining amount from his siblings account so that no TCS can be levied on the amount transferred," said Abhishek Nangia, Senior Associate, SKV Law Offices.
How else can parents lower this TCS burden?
Since educational purposes do not attract TCS as long as it is below Rs 7 lakh, students should not worry about increased tax liabilities. "However, it is good to keep transaction details and receipts wherever any fee or money is being spent for education-related expenses," said Adhil Shetty, CEO of BankBazaar.
Jain has the following advice for parents:
1. Utilise the Rs 7 lakh exemption limit per parent.
2. If possible, involve grandparents for additional remittances.
3. Consider funding through an education loan to take advantage of the lower TCS rate.
4. Keep all required documentation handy and ensure all remittances are properly categorised for education to avail lower TCS rates.
What if I have given my child a forex card to fund expenses?
If a student uses a forex card to meet expenses abroad, a TCS of 20 per cent will be levied, clarified Nangia. Prepaid forex cards do not enjoy the concessional TCS threshold limits applicable to ICCs and IDCs. However, if the student has been given an international debit or credit card, then no TCS will be charged till a threshold of Rs 7 lakh.
TCS is levied at the time of loading currency in the forex card. The use of such loaded currency cannot be pre-fixed to educational purposes only. So, it is not possible for an authorised dealer to know the purpose for which the currency would be used at the time he loads the card
"If the forex card is exempted just by giving declaration, the risk of misuse would be very high wherein people would make misdeclarations just to avoid the TCS," said Ankit Jain.
The bank might only classify payments directly made to the colleges as "education" since there's no clear definition for "education purposes. Hence, direct payments by parents for living expenses such as rent, food, etc. may not be categorised as education while using a forex card. "These payments would then attract a TCS rate of 20% with no basic threshold, even if made through a forex card recharged by the parents in India," added Jain.