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Tax Collected at Source Applicable on FOREX transactions From October 2020

The Finance Act 2020 has introduced new Income Tax provisions with respect to Tax Collected at Source (TCS) on foreign remittance on all forex transactions under Liberalised Remittance Scheme (“LRS”) from 1st October, 2020.

5% TCS to be applicable on FOREX transactions (LRS) w.e.f 1st October, 2020

As per Union Budget 2020, remittances/forex transactions aggregating to Rs. 7 lakhs or more in a financial year under the Liberalised Remittance Scheme (LRS) will now be subject to 5% Tax Collected at Source (TCS). This change will be effective from 1st October, 2020.

Effective 1st October, 2020, banks are obligated to collect TCS for remittance(s) out of India under the LRS of RBI.

Please note, as per RBI guidelines, you can remit upto USD 250,000 in a financial year under LRS.

  1. What is Liberalised Remittance Scheme (LRS)?

    Under the Liberalised Remittance Scheme (LRS), all resident individuals (as defined under FEMA 1999), including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

    It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) for all transactions under LRS.
  2. What is the effective date of applicability of the TCS on foreign remittances under LRS ?

    TCS on foreign remittance under LRS is effective on any remittance transaction under LRS on or after 1st October, 2020.
  3. What are the different purposes on which the tax collection is applicable?

    The tax will be applicable on all remittance(s) that fall under the LRS of RBI.
  4. What all transactions will be impacted by this TCS provision?

    All remittances more than INR 7 lakh in a financial year done under the LRS will be liable for a 5% TCS, except if the remittance is for education paid through a loan obtained from any financial institution, where the TCS rate would be 0.5%.

    The exemption from the TCS on remittance overseas under LRS for amounts less than INR 7 lakh in a financial year will not be applicable, if the amount is being remitted for the purchase of overseas tour program package. Therefore, there is no monetary threshold prescribed for remittance for the purchase of overseas tour program package and the bank will collect the TCS on the entire amount irrespective of its value.
  5. What is the new tax implication on remittances for pursuing overseas education?
    The TCS at 0.5% shall be applicable on the amount exceeding INR 7,00,000 in a financial year under LRS, if the amount remitted is obtained out of a loan from a Financial Institution for pursuing education.

    For this purpose, ‘Financial Institution’ means a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf.

    E.g. if the total amount remitted under LRS in a financial year is INR 8,00,000 for pursuing overseas education, TCS at 0.5% will be applicable on INR 1,00,000 (INR 8,00,000 – INR 7,00,000).
  6. What is the tax implication if the amount remitted for pursuing education abroad is from owned funds or out of loans from Non-specified institutions/private parties?

    The TCS at 5% shall be applicable on remittances exceeding INR 7 lakhs in a financial year.
  7. What is the tax implication of remittances for the purchase of overseas tour program package under LRS?

    The TCS at 5% will be applicable on the total amount remitted and the bank will collect the TCS on the entire amount irrespective of its value.
    For instance, if the amount remitted is INR 2,00,000, the TCS at 5% will be applicable on entire INR 2,00,000.
  8. Which transactions are included in the threshold limit of INR 7 lakhs, above which the TCS shall be applicable?

    All forex transactions under LRS will be included in threshold limit of INR 7 lakhs. However, there is no monetary threshold prescribed for overseas remittance through our program package and the bank will collect the TCS on the entire amount irrespective of its value.
  9. How threshold limit of INR 7 lakhs would be computed for FY 2020-21?
    The TCS on all forex transactions under LRS shall be applicable from 1st October, 2020.
    However, for tracking the threshold limit of INR 7 lakhs, all forex transactions under LRS made from 1st April, 2020 would be considered.
  10. Will the TCS be applicable if the foreign exchange facility is availed in Cash / Forex cards?

    Yes, TCS will be applied on LRS transactions exceeding INR 7 lakhs if foreign exchange facility is availed of through FCY Cash withdrawal at branches / loading Forex cards.
  11. What is the applicable TCS if PAN /AADHAR is not updated on Bank’s records?
    It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) for all transactions under LRS.
  12. Will GST be applied on the TCS amount?

    No GST will be applicable on the tax collected as TCS. However, GST will be applicable on the currency conversion, remittance service charge and other charges.
  13. What are the scenarios under which the Bank will not collect TCS?

    The Bank will not collect the TCS in case:
    • The remitter is liable to deduct tax at source under any other provision of the act and the amount has been deducted and proof of the same is submitted to the bank
    • The remitter is the Government or any another person notified by the Government
    • The seller of the overseas tour program package has already collected TCS
  14. If remitter/ customer can avail tax credit of the TCS?

    Yes, the remitter / customer can claim credit for the tax collected by the bank while filing for their tax returns as the TCS is deemed to be a payment of tax on behalf of the person from whom the amount has been collected.
  15. What if the tour package/educational program etc. is subsequently cancelled or not persuaded?

    The banK will not refund the TCS collected by it and paid to Government. However, the credit for the same shall be available to the remitter/customer and they can claim refund By filing income tax returns.

    For any queries, you can ask them in the comments below.

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