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India to collect 20% tax on remittances. Should NRIs be worried?

Tax expert clarifies concerns regarding application of provision from July 1, 2023

The moment we hear the word tax, first thought that comes to mind is that our pockets are going to get lighter by the amount of tax that is being paid out. Let us set the context for tax collected at source (abbreviated as TCS) applicable on overseas remittances from India effective July 1, 2023.

Indians have been travelling abroad for various purposes — be it for education, medical, business, tourism or meeting relatives and friends. Reserve Bank of India introduced a liberalised remittance scheme (abbreviated as LRS) effective from February 4, 2004 allowing resident individuals (not companies) to remit foreign currency of up to $25,000 for specified purposes for each financial year (from April to March). This threshold was revised upwards to $50,000 in 2007 and $250,000 per financial year in 2013.

Over a period of time, Indian taxmen noticed a gap in various cases between taxable income declared by the resident individuals vis a vis amount being remitted overseas every year. To combat tax avoidance, the government introduced this provision of TCS with effect from October 1, 2020 on remittances under LRS.

Under this provision, an individual who is tax resident in India is permitted to remit foreign exchange of up to $250,000 (approximately Dh918,000) without any special approval from Reserve Bank of India. Such remittance proceeds shall be subjected to TCS, wherein the forex dealer shall collect TCS at the rate of 5 per cent and remit this tax amount to the tax department under the remitter’s PAN (permanent account number of the taxpayer). The remitter, who is a tax resident in India shall be able to claim credit for this TCS while filing the return of income for the financial year.

India’s finance minister has raised this rate of TCS while presenting the budget for the 2023 from 5 per cent to 20 per cent. This increase is applicable from July 1, 2023. This means that funds remitted overseas on foreign trips, sending money abroad for investing or for other purposes, except for medical and education purposes, will be subjected to 20 per cent TCS. While funds being remitted for education will continue to be subjected to TCS at the rate of 5 per cent for remittances in excess of Rs700,000 (approximately Dh31,500), other expenses incurred for purposes apart from payment of education fees shall be subjected to TCS at a higher rate of 20 per cent. In case resident individuals avail education loan for overseas education expenses, TCS rate stands reduced at 0.5 per cent of the remittance proceeds (to the extent of educational loan amount) and there is no change in this rate, even in the changes introduced in this year’s budget.

This increase of TCS rate from 5 per cent to 20 per cent will have a significant bearing on the remitter, the resident individual, who will have to pay TCS at the time of remittance and adjust this amount of tax against tax liability due on income earned during the financial year.

It is noteworthy to mention that such provision for applying TCS at the rate of 20 per cent will certainly be a detriment for resident indians willing to invest overseas in global stock markets, real estate or business. These avenues have been gaining immense traction for the ever-growing population of high networth individuals in India. Going forward, these individuals may change their mind, unless they end up coughing such higher amount of TCS while opting to remit funds under LRS and end up claiming this TCS at the time of filing tax return.

Emphasis is on the word resident individuals repatriating money overseas through liberalised remittance scheme, hence, a clear sigh of relief for non-resident Indians (NRI). There is no cause of concern for NRIs to worry about this increase in the rate of TCS from 5 per cent to 20 per cent as this provision applies to resident Indians remitting funds abroad under the LRS route. To elaborate further, TCS is not applicable on money remitted by NRIs from their NRO account to NRE account or foreign account.

To elaborate further, if an NRI visits India and opts for a tour package overseas, payments by the NRI will not be subjected to TCS, as clarified by the Central Board of Direct Taxes via a press release dated March 31, 2022.

TCS — like TDS (tax deducted at source) — is a tax being paid in advance by resident Indians, such payment of TCS or TDS is considered as tax paid in advance and adjusted against tax liability on taxable income for the financial year. Yes, an increase in cash outflow to pay TCS means increase in inflow of taxes for the Government.

The writer is founder and CEO of ZTI Global.