Union Budget 2024: Will Budget 2024 reduce TCS from 20% to 5% on certain foreign remittances via LRS?

Union Budget 2024: TCS, which stands for Tax Collected at Source, is a form of income tax that is levied by the seller of specific goods and services on the purchaser. Regarding Foreign Remittance Transactions, this form of tax may be imposed on you as the sender when you transfer money overseas.

In Union Budget 2023, which was the last full Budget, made a significant change to the Tax Collected at Source (TCS) rate on foreign remittances under the Liberalised Remittance Scheme (LRS), raising it from 5% to 20%, with some exceptions. These revised rates became operational starting from July 1, 2023. Additionally, the budget included international credit card payments within the ambit of LRS and implemented TCS on such transactions.

Liberalised Remittance Scheme is a foreign exchange policy initiative introduced by the Reserve Bank of India (RBI) in 2004. LRS was designed to make it easier and more efficient for individuals in India to send money abroad. This scheme was created to assist Indians in navigating the limitations on international fund transfers imposed by the Foreign Exchange Management Act (FEMA) of 1999. Through the LRS, resident individuals are allowed to securely remit funds up to a specified limit for a variety of allowable transactions related to current or capital accounts.

TCS structure on remittances made under LRS

1. Education: As per Section 206C(1G) of the Income Tax Act, an authorised dealer must collect 0.5% on any amount exceeding Rs 7 lakh per financial year from individuals making remittances outside India under Liberalised Remittance Scheme (LRS) for educational loans provided by recognised financial institutions or approved charitable institutions specified under Section 80E of the Income Tax Act. 

In cases where the educational loan is obtained from an institution not covered by Section 80E or for purposes other than education, the Tax Collection at Source (TCS) rate is 5% on any amount exceeding Rs 7 lakh.

2. Other clauses: In the past, the TCS rate stood at 5% on remittances that surpassed Rs 7,00,000 within a financial year. Following the amendment in the Finance Act of 2023, the rate saw a significant rise to 20% with no specified threshold starting July 1, 2023. However, due to practical challenges, a restoration took place concerning the Rs 7,00,000 limit for all LRS payment categories, as confirmed by a Ministry of Finance press release dated June 28, 2023. The implementation of the increased rate was postponed to October 1, 2023, from the initially proposed date of July 1, 2023.

3. Travel: After the regulatory announcement made by the Ministry of Finance on June 28, 2023, it was determined that the Tax Collected at Source (TCS) rate would be set at 5% for remittances within the range of up to Rs 7 lakh per individual per financial year, specifically for the purpose of purchasing overseas tour packages. Subsequently, commencing from October 1, 2023, any remittance amounts surpassing the threshold of Rs 7,00,000 would attract a higher TCS rate of 20%.

4. Credit card transaction: It is important to highlight that the government has made the decision to delay the incorporation of international credit card transactions within the Liberalized Remittance Scheme (LRS). As a result, these transactions are presently excluded from the Tax Collected at Source (TCS) regulations under Section 206C(1G) of the Income Tax Act. 

Budget proposals

"A higher TCS rate of 20% effectively blocks a larger portion of funds at the time of remittance. This can create liquidity challenges for taxpayers, especially individuals who rely on regular remittances for personal or business needs," Suresh Surana, Practising CA.

He further noted:

1. Lowering the TCS rate to 5% would have a significant impact on reducing the funds that are blocked, subsequently boosting liquidity for taxpayers. This enhanced liquidity provides individuals with the flexibility to allocate funds towards immediate requirements, investments, or other constructive purposes, thereby fostering increased economic activity.

2. Reduction in the TCS rate ensures that the government can adeptly oversee and regulate high-value foreign exchange transactions to uphold tax compliance measures effectively. This adjustment strikes a balance between enhancing liquidity for taxpayers and maintaining regulatory oversight in pertinent financial matters.

3. It is anticipated that the forthcoming Budget 2024 may consider revising the rate of LRS to address the practical challenges encountered by ordinary resident individuals when remitting funds through this channel. Such revisions would likely alleviate burdens on taxpayers and streamline the process for foreign fund transfers.