Parents may use education loan, dollar assets to lessen TCS impact

Travellers may split forex purchases, use international cards on foreign sites, and book various elements of the trip separately

Starting from October 1, 2023, the new Tax Collected at Source (TCS) rates have come into force for remitting money abroad from India under the Liberalised Remittance Scheme (LRS). The new rates were kept in abeyance for three months but will now increase for several types of transactions.

Key changes  

TCS of 20 per cent will now apply to payments made using forex cards, foreign currency purchases, and cross-border wire transfers above Rs 7 lakh (except for education and medical purposes).

Says Sudarshan Motwani, founder & chief executive officer (CEO), BookMyForex.com: “In the current scenario, there is no TCS on amounts below Rs 7 lakh.”

The use of international credit cards while one is overseas has not been categorised under LRS yet. Says Adhil Shetty, CEO, BankBazaar: “TCS on expenses incurred using international credit cards while abroad has not been waived. However, the implementation has been postponed indefinitely because of a lack of infrastructure. So, no TCS is payable currently.”

Rates for students

On education financed by a loan, the TCS rate is zero up to Rs 7 lakh and 0.5 per cent above that threshold. Says Keshav Singhania, private client leader, Singhania & Co. LLP: “The limits are to be observed on an aggregate gross basis per financial year per remitter.”

On education not financed by a loan and on medical treatment, the TCS is zero up to Rs 7 lakh and 5 per cent above that amount.

What should parents do

Taking an education loan from a regulated financial institution has become an attractive option. Says Jay Thacker, registered investment advisor, Association of Registered Investment Advisors: “These loans incur a TCS rate of only 0.5 per cent above Rs 7 lakh compared to 5 per cent when the funds are not borrowed.”

To remit funds for education, parents must file Form A2 plus LRS declaration with the bank that is the authorised dealer (AD). Says Singhania: “Enter the accurate purpose code in the documentation at the AD bank to ensure the remittance is categorised appropriately and enjoys a lower TCS rate.”

If parents have overseas investments, these funds can be used to fund children’s higher education abroad. 

Not only will they not have to pay TCS, they will also be able to avoid the fees on currency conversion and transfer.

LRS limits apply to each remitter. If a student studying abroad requires more than Rs 7 lakh, the remittance can be divided among the family members so that no individual exceeds the threshold limit. Says Singhania: “Doing so will not attract adverse tax implications since the donor and the donee would be classified as relatives under the Income-Tax Act.”

Rates for travellers   

Purchase of overseas tour packages of up to Rs 7 lakh in a financial year will attract a TCS of 5 per cent. When the cost exceeds Rs 7 lakh, the rate will rise to 20 per cent. Says Nihal Bhardwaj, associate, SKV Law Offices: “Suppose an Indian tourist visits Europe and the tour package costs Rs 20 lakh. The tourist will pay 5 per cent TCS on the first Rs 7 lakh and 20 per cent on the remaining Rs 13 lakh.”

Says Motwani: “No TCS will be levied on business trips and commercial transactions.”

The limit on forex is Rs 7 lakh per person per year. Says Motwani: “A family of four can have Rs 28 lakh in a year. Hence the TCS exemption limit of Rs 7 lakh per traveller per year will not hurt much.”

What should travellers do

Travellers can take several steps to reduce the TCS impact. While purchasing forex, they should utilise the Rs 7 lakh exemption limit for TCS prudently per individual annually. Says Motwani: “If there are two travellers, they can split the purchase of forex between them.”

Travellers can also use credit cards. Says Bhardwaj: “Tourists may organise their overseas vacations using international websites and then pay using international credit cards.”

Consider booking individual components of your international holiday separately instead of as a tour package. Says Bhardwaj: “These elements could include accommodation, travel, and subsistence costs.” 

These separate reservations will not get categorised as a tour package, which incurs 20 per cent TCS above Rs 7 lakh.

Tips on adjusting TCS early
 

- Tax Collected at Source (TCS) does not impose an additional tax burden
 

- The amount deducted as TCS can be utilised to offset the individual’s tax due while submitting the Income-Tax Return (ITR) 
 

- An individual who does not possess any tax liability can make a formal request for a refund of the TCS amount
 

- Business owners can adjust TCS in their advance tax payments
 

- Salaried employees can request their employers, who may adjust TCS against the tax deducted at source (TDS) payable