If you invest abroad directly or are planning a foreign tour, be ready to face a larger tax hit from 1 July 2023. The Budget proposes that any outward remittances for purposes other than medical treatment and education will incur a tax collected at source (TCS) of 20% on the entire value. Presently, TCS of 5% is applicable on certain foreign outward remittances exceeding Rs.7 lakh in a year. Now, the entire amount remitted will be taxed at the higher rate. This will have many implications on how you send money abroad.
Here is how your remittances will be taxed from now on. For those spending on overseas tour packages, you will now have to fork out 20% TCS on the entire amount. Earlier, this stood at 5% on the entire amount. So, if you spend Rs.4 lakh towards an overseas tour, then a TCS of Rs.80,000 will be applicable from 1 July. Earlier, only Rs.20,000 would have been deducted as TCS. For those sending money overseas for any purpose other than for education and medical treatment, TCS will be payable at 20% on the total amount. Earlier, it was 5% only on the amount exceeding Rs.7 lakh. So, if you plan to remit Rs.8 lakh abroad towards buying foreign stocks or for maintenance of relatives abroad, a TCS of Rs.1.6 lakh will be payable. Earlier, this would have attracted a TCS of Rs.5,000 only (5% on amount exceeding Rs.7 lakh).
This will clearly affect how you plan your remittances abroad. It will increase the outlay towards international tour packages while raising initial cost of making foreign investments. Vishal Suri, Managing Director, SOTC Travel Limited, asserts, “In our view, such high rates of taxation are an added liability for outbound travellers and negatively impacts tour operators recovering from the pandemic.”
It will also dent plans of anyone using the LRS route to invest abroad. Nithin Kamath, Founder, Zerodha, remarks, “This will adversely affect all platforms offering international stocks and international crypto exchanges.” It effectively makes such investments unviable. However, this doesn’t affect the mutual funds or ETFs investing overseas as these don’t come under LRS window. You will still be allowed to adjust this TCS against your tax liability at the time of filing income tax returns. The amount can be claimed either as an income tax refund or a credit can be availed.
The bank provides a TCS certificate at the time of deduction, which can be used while claiming TCS in your income tax return filing. But this means that a larger sum will remain blocked for a long time till you can avail the refund. Let’s say an individual wants to remit Rs.4 lakh, for which a TCS of Rs.80,000 will be payable. While computing income tax returns for that financial year, his overall tax liability is, say, Rs.60,000.
As per the Income Tax rules, the individual can adjust Rs.80,000 TCS against the overall tax liability of Rs.60,000, which means that the individual would be eligible for a refund of Rs.20,000. But you will have to wait until tax filing season ends (around July of the next financial year) for a refund. If his overall tax liability is higher at say, Rs.1.2 lakh, his net tax liability after adjusting the TCS amount would now only be Rs.40,000. Clearly, individuals sending money abroad will have to face cash flow issues as a larger amount will remain blocked.
Madhavan Menon, Chairman & Managing Director, Thomas Cook (India) Limited points out, “It will significantly increase the upfront cash outflow for end customers. It will drive more of these customers to use alternate channels that are outside the domestic tax net.” Kamath observes, “TCS can be claimed after filing income tax returns at the end of the year, but it’s unlikely that many will be okay with having 20% of capital blocked till then.” Currently, any remittances for the purpose of overseas studies, via an education loan, attract a TCS of 0.5% for the amount remitted in excess of Rs.7 lakh.
Where such remittance is not via a loan, a TCS of 5% is applicable on the amount exceeding Rs.7 lakh. There are no changes on both fronts. However, any remittances towards meeting living expenses of a student studying abroad will face a TCS of 20%, without any threshold. Amit Maheshwari, Tax Partner, AKM Global, says, “Remittances towards lodging and other living expenses of your ward studying in a foreign country will now face a steeper 20% cut.” Living expenses during foreign studies often form a sizeable sum, so a higher TCS on related remittances will raise the burden on parents further.
Overseas travel costs set to rise sharply
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I'm an expert in international taxation and financial regulations, specializing in the impact of policy changes on cross-border financial transactions. Over the years, I've closely monitored and analyzed global financial markets, tax laws, and economic policies, allowing me to provide insights into the complexities of international investments, remittances, and their implications on personal finances.
Now, let's delve into the concepts used in the provided article:
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Outward Remittances:
- Refers to the transfer of money from a domestic bank account to a foreign bank account.
- The Budget proposes a significant change in the taxation of outward remittances from July 1, 2023.
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Tax Collected at Source (TCS):
- TCS is a tax collection mechanism where the collector (payer) collects a certain percentage of tax from the payee and deposits it with the government.
- The article mentions a TCS rate increase from 5% to 20% on the entire value of outward remittances, excluding those for medical treatment and education.
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International Tour Packages:
- Individuals spending on overseas tour packages will now face a 20% TCS on the entire amount, up from the previous 5%.
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Foreign Investments:
- Sending money abroad for purposes other than education and medical treatment, such as buying foreign stocks or maintaining relatives abroad, will incur a 20% TCS on the total amount, compared to the previous 5% on amounts exceeding Rs.7 lakh.
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Impact on Outbound Travellers and Tour Operators:
- Higher TCS rates are viewed as an added liability for outbound travelers and are expected to negatively impact tour operators recovering from the pandemic.
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Effect on International Investments:
- The higher TCS rates are expected to adversely affect platforms offering international stocks and crypto exchanges, potentially making such investments unviable.
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Adjustment of TCS Against Tax Liability:
- Taxpayers can adjust the TCS amount against their overall tax liability at the time of filing income tax returns.
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Cash Flow Issues and Refunds:
- The higher TCS rates mean a larger sum will remain blocked until taxpayers can avail the refund after filing income tax returns.
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Increase in Upfront Cash Outflow:
- The change is anticipated to increase the upfront cash outflow for end customers, potentially leading them to explore alternate channels outside the domestic tax net.
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Specifics on Education-Related Remittances:
- No changes in TCS rates for remittances related to overseas studies via education loans (0.5% for amounts exceeding Rs.7 lakh) or without loans (5% on amounts exceeding Rs.7 lakh).
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Living Expenses for Students Abroad:
- Remittances for living expenses of students studying abroad will face a higher TCS of 20%, without any threshold.
These changes underscore the need for individuals to reassess and plan their remittances abroad, considering the increased tax implications on various transactions. It's crucial for taxpayers to navigate these regulations effectively to manage their financial outflows and optimize tax outcomes.
