Indian Residents to Face 20% TCS on Foreign Remittances Exceeding Rs 7 Lakh Starting October 1, 2023

Key Takeaways:

1. Indian residents investing in foreign assets will be subject to a Tax Collected at Source (TCS) of 20% on foreign remittances exceeding Rs 7 lakh starting from October 1, 2023.

2. Presently, there is no TCS on foreign remittances up to Rs 7 lakh per year, but if investors send more than Rs 7 lakh for investments in foreign securities under the Liberalised Remittance Scheme (LRS), a TCS of 5% is applicable.

3. The Budget 2023 has raised the TCS rate on foreign remittances of over Rs 7 lakh through the LRS to 20%, which will come into effect on October 1, 2023.

4. TCS is not an additional tax burden and can be offset against the tax liability when filing the income tax return (ITR). If there is no tax liability, a refund for the TCS amount can be requested, although this may lead to cash flow challenges.

5. Exemptions to the new TCS rule include no application of TCS if an individual remits less than Rs 7 lakh in a year, if foreign investments are made through an entity rather than in an individual’s name, and investing in overseas markets through international mutual funds also avoids TCS.

Based on the provided information, it seems that starting from October 1, 2023, Indian residents investing in foreign assets will be subject to a Tax Collected at Source (TCS) of 20% on foreign remittances exceeding Rs 7 lakh. This change in tax regulations will impact those investing in international stocks or planning to acquire real estate abroad.

Here’s a breakdown of the TCS and its implications for investors:

TCS on Foreign Remittances

Presently, there is no TCS on foreign remittances up to Rs 7 lakh per year. However, if investors send more than Rs 7 lakh for investments in foreign securities under the Liberalised Remittance Scheme (LRS), a TCS of 5% is applicable.

The Budget 2023 has raised the TCS rate on foreign remittances of over Rs 7 lakh through the LRS to 20%, which will come into effect on October 1, 2023.

Implications for Investors

If an Indian resident directly investing in US stocks has already invested Rs 7 lakh in the relevant financial year and plans to add Rs 1 lakh more to their overseas broking account, a TCS of 20% will be deducted by the bank when remitting Rs 1 lakh to the broking account, leaving only Rs 80,000 in the broking account.

To purchase shares worth Rs 1 lakh (after reaching the Rs 7 lakh limit), the investor will need to deposit Rs 1.25 lakh to ensure that the brokerage account will have Rs 1 lakh, as 20% (equivalent to Rs 25,000) will be deducted as TCS by the bank.

Offsetting TCS and Exemptions

TCS is not an additional tax burden. The amount deducted as TCS can be offset against the tax liability when filing the income tax return (ITR). If there is no tax liability, a refund for the TCS amount can be requested, although this may lead to cash flow challenges.

Exemptions to the new TCS rule include no application of TCS if an individual remits less than Rs 7 lakh in a year, if foreign investments are made through an entity rather than in an individual’s name, and investing in overseas markets through international mutual funds also avoids TCS.

Claiming TCS and Cash Flow Considerations

To claim TCS while filing the ITR, it is important to ensure that the TCS is reflected in form 26AS, maintain the bank transaction note, and keep the receipt of share purchase. Tax collectors are also required to issue a TCS certificate as Form 27D to the taxpayer whose TCS has been collected, serving as proof for claiming deductions.

For those who pay advance tax, the 20% TCS on foreign remittances over Rs 7 lakh may not pose significant challenges, as they can offset this amount against their advance tax payments. However, salaried individuals may experience cash flow issues, as they must wait until the return filing date to claim a refund of the TCS amount.

FAQ

Q1: When will the new TCS regulations come into effect?

A1: The new TCS regulations, which impose a 20% TCS on foreign remittances exceeding Rs 7 lakh, will come into effect on October 1, 2023.

Q2: Can the TCS amount be offset against tax liability?

A2: Yes, the amount deducted as TCS can be offset against the tax liability when filing the income tax return (ITR). If there is no tax liability, a refund for the TCS amount can be requested, although this may lead to cash flow challenges.

Q3: Are there any exemptions to the new TCS rule?

A3: Yes, exemptions include no application of TCS if an individual remits less than Rs 7 lakh in a year, if foreign investments are made through an entity rather than in an individual’s name, and investing in overseas markets through international mutual funds also avoids TCS.