Many people reside in foreign countries for purposes like education, jobs, etc., and often need funding from friends and family who are living in India. Earlier in 2004, transferring funds from India to another country came with grievous limitations under the Foreign Exchange Management Act, 1999 (FEMA). Consequent to which, Reserve Bank of India (RBI) initiated the Liberalized Remittances Scheme (LRS) to ease smooth foreign transactions.
What is LRS?
Liberalized Remittances Scheme (LRS) is a foreign exchange policy initiated by the RBI, with an objective to simplify and make the process of dispatching funds outside India comprehensive.
Under the Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) outside India for any permissible current or capital account transaction or a combination of both. However, the LRS is not applicable on Corporates, Partnership firms, Hindu Undivided Families, etc.
These permissible transactions include the limits for education, medical treatment, employment, emigration, travel, investment, etc., but the same does not include usage of remittances for margin trading, buying lottery tickets, etc. i.e., according to a notification by the RBI dated May 26, 2015, the Revised Schedule III stated that:
Individuals can avail of foreign exchange facilities for the following purposes within the limit of $2,50,000 per annum. Any additional remittance in excess of the said limit for the following purposes will require prior approval of the Reserve Bank of India.
- Private visits to any country (except Nepal and Bhutan)
- Gift or donation
- Going abroad for employment
- Maintenance of close relatives abroad
- Travel for business, attending a conference or specialized training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/check-up.
- Expenses in connection with medical treatment abroad
- Studies abroad
- Any other current account transaction
Thus, it is evident that international commerce, foreign investment, and other developments have all been made possible since the Liberalised Remittance Scheme was implemented.
Taxation on Outbound Remittances – Recent Development
Depending on the holding time and the nature, the outbound remittance, through LRS are subject to TCS i.e., Tax Collected at Source in India.
According to the recent amendments made to the Foreign Exchange Management Act (FEMA) (w.e.f October 01, 2023), the credit card payments for transactions falling under Schedule III transactions will also come under LRS. In other words, the usage of international credit card use is now included under the Scheme by the Ministry of Finance, India.
As per the amended Income-tax Act, 1961, the tax on outbound remittance from India for holidays, investments, and gifts etc. have recently increased from a rate of 5% (five percent) to 20% (twenty percent); Exceptions applying to funds sent for the purpose of Education and Medical services.
However, a new clarification was further released dated May 19, 2023, by the Ministry clarifying that for relatively small transactions, totalling up to or less than INR 7,00,000 (INR Seven Lakhs) or (US $8,500), conducted using international or overseas Credit cards per financial year would be excluded from the Liberalised Remittance Scheme (LRS scheme). As a result, no Tax Collected at Source (TCS) will be applied to these transactions; taking into consideration that the threshold of INR 7,00,000/- for LRS is the combined level for calculating TCS, irrespective of the purpose of remittance.
- Remittance for the purpose of any education (no change)
|Old position||After Finance Act,2023|
|UP TO (30.6.23)||FROM (01.07.2023)|
If the amount being remitted out is a loan obtained from any financial institution as defined in section 80 E
|7 lakhs||0.50%||7 lakhs||0.50%|
|Remittance is not out of loan from a financial institution ||7 lakhs||5%||7 lakhs||5%|
#Remmittance for education will include the travel cost, tuition fees & other day-to-day expenses for studies.
- Remittance for the purpose of any medical treatment (no change)
|Old Position (up to 20.03.23)||After Finance Act 2023(01.07.2023)|
|Remittance is for Medical Treatment||7 lakhs||5%||7 lakhs||5%|
#Remmittance for medical purposes will include spending on tickets, medical cost, and day-to-day expenses for this purpose.
- Sale of Overseas tour package
|Old Position (Up to 30.6.23)||After Finance Act 2023From 01.07.2023|
|Remittance is for the purchase of an overseas tour package||Nil||5%||Nil||20%|
#Remmittance for an overseas tour package will cover travel expenses, hotels, boarding and lodging and expenditure of similar nature.
#Purchase of only international tickets or just hotel stay is not covered.
- Any other Remittance (for Bonds, shares, real estate gifts, etc.)
|Old Position||After Finance Act 2023|
|Up to 30.6.23||From 01.07.2023|
|Remittance is for any other purposes||7 lakhs||5%||Nil||20%|
Who will collect TCS?
TCS is not a tax by itself, therefore, it is adjustable against a taxpayer’s total income tax liability in a particular financial year.
The bank that provided the credit card would be the authorized dealer with the responsibility of collecting an extra 20% from the owner of the credit card, depositing it as TCS. The TCS collected would then be put into the cardholder’s PAN, which is adjusted against any income tax liability for that financial year.
Thus, simplifying the TCS rule, Pallav Pradyumn Narang, Partner, CNK, said that,
“The measures impose a collection of tax at source from your account every time you spend your money using your credit card on international spends. In simple words, it blocks a chunk of cash that will be available to you as a tax credit or a refund only after you file your income tax return.”
Therefore, to conclude what has been stated so far, the credit for the TCS paid in such outbound remittances can be claimed by a person/individual against regular income and adjust it against the advance tax etc., payments accordingly. The new amendment has been introduced with the primary Impact on investment in assets such as real estate, bonds, stocks outside India by High-Net-Worth Individuals (HNI) and tour packages or gifts to non-individuals since the position with the medical and educational expenses stays as it was before the Finance Act, 2023.
Thus, keeping in view the implications and amendments, one needs to understand what the Liberalised Remittance Scheme stipulates, especially its eligibility criteria and documentation requirements for a hassle-free transaction.
LEGALLANDS LLP has the requisite experience, skills and network to deal with matters relating to Taxation including Income Tax, GST, Customs, International Taxation, FTP and FEMA among others. Further, our Expert professional team can study, interpret, and research, strategies- legal and lobbying, negotiate, formulate, and draft contracts &, suits & claims & petitions, etc., for all sorts of International Disputes such as Sale & Purchase of Goods or Services, Joint Ventures and Collaborations, Technology Transfers, Government Contracts, E-Commerce, Banking and Payment Settlements, Third Party Guarantees and many more.