The 2020 Union budget introduced a tax levied at source (TCS) on foreign exchange transactions. A TCS of 5% will be applicable on all of the above remittances ₹7 lakh under the RBI Liberalized Cash Transfer (LRS) program. The TCS on foreign remittances will come into effect on October 1. The TCS will also be applicable to foreign investments. International funds have recently gained in popularity due to the fabulous returns this year. How will this tax impact global investment, should investors be concerned? Read on to learn all about TCS and overseas investing.
What is the LRS or Liberalized Remittance Scheme?
First, a few basics. LRS allows a person to contribute up to $ 250,000 (approximately ₹1.83 crore at an exchange rate of 73.50) in a fiscal year for expenses such as travel and education, as well as for capital account transactions such as investing in foreign stock markets . From the next few months, a tax will be levied at source on the above foreign remittances ₹7 lakh. It is important to note that the tax is only applicable to the payer, not the payee. The payer will receive a TCS certificate and may request a refund when filing TI’s annual returns.
What are the changes to the TCS rule?
The 2020 Union budget introduced a tax levied at source (TCS) on foreign exchange transactions. A TCS of 5% will be applicable on all of the above remittances ₹7 lakh under the RBI Liberalized Cash Transfer (LRS) program. The TCS on foreign remittances goes into effect on October 1.
“TCS will only apply to the amount exceeding ₹7 lakh per fiscal year and not on the total amount. For example, if you give ₹10 lakh per exercise, TCS will apply to excess ₹3 lakh at a rate of 5%, and therefore will incur a tax of ₹15,000, ”says Prateek Jain, co-founder and chairman of Winvesta, a global investment platform.
Payments for organized trips abroad are also subject to the TCS of 5%. There will be no TCS if you book a tour abroad yourself instead of going through a travel agency.
Educational remittances from a loan from a financial institution in India will carry a TCS at a reduced rate of 0.5% on the amount exceeding ₹7 lakh.
How much will TCS hurt? Indians investing abroad?
International investment planners and experts do not believe this tax should hurt investors. They say the tax paid can be claimed later. Here’s what the experts said:
“The new withholding tax (TCS) rule change on foreign exchange transactions should not deter Indian investors looking to invest in US stocks or other global markets. Although this increases the initial cost of foreign transactions, but the increased initial costs can eventually be recouped with tax returns. In addition, investors paying less than ₹7 lakh per year (approximately $ 9,500 at an exchange rate of 73.5) will see no impact from these rules, ”said Prateek Jain of Winvesta.
Some other experts said it was more of a way of looking at cash management than an added cost to the investor.
“Investors should not change their decision to invest abroad because of this tax. Once the TCS is paid, an investor can offset other tax obligations during the year to increase the cash available to him. if he does not wish to wait until the date of filing of the RTI to claim the credit or the refund, ”said Viram Shah, co-founder and CEO of Vested Finance.
“For ordinary taxpayers, the CHT will be available as a credit or reimbursement depending on the taxes they owe. In fact, one can offset their TDS obligations. For example, employees can reduce their monthly TDS deductions, ”adds Viram Shah.