What is tax collection at source on foreign remittances under LRS? An explainer

In the Budget 2023, government rolled out a higher tax collection at source (TCS) of 20 percent on outward remittances under the Liberalised Remittance Scheme (LRS)

The higher tax rate was supposed to come into effect from July 1 onwards, but on June 28, 2023, a finance ministry notification clarified that the higher rates will come into force when the threshold is higher than Rs 7 lakh.

The new rates will now be effective from October 1, 2023. And until Sep 30, the old rates will continue to be in force.

Under LRS, can remit up to $2,50,000 in a financial year. Under this, one can remit money overseas for a host of purposes such as travel, business trips, employment, medical purpose, education, gift or donation.

Education and medical expenses

When outward remittances are sent for the purpose of education, the finance ministry in its June 28 notification clarified, there will be no tax collection at source for an amount up to Rs 7 lakh.

And when the amount is higher than Rs 7 lakh with regards to educational expenses, the rate of TCS will be 5 percent.

Similarly, when the remittances are meant for medical expenses, there will be no TCS on an amount up to Rs 7 lakh. Anything above this will attract a TCS of 5 percent.

For all other expenses, the rate of TCS on foreign remittances beyond Rs 7 lakh will attract a higher rate of 20 percent.

And there will be no TCS on an amount lower than Rs 7 lakh.

However, for overseas tour packages, the rate of TCS will be 5 percent for an amount lower than Rs 7 lakh and 20 percent for a higher amount.

What about overseas credit cards?

The higher rate of TCS will not apply to overseas credit card spends. This means the amount spent via overseas credit card will not be factored into while calculating the threshold of Rs 7 lakh.

The government, however, had announced earlier that the overseas credit card spends will be covered for TCS.

But after recommendations from a number of stakeholders, the government decided to reverse the decision.

The Ministry of Finance eventually announced that credit card transactions conducted abroad will be exempt from the tax collection at source (TCS) on foreign transactions.

However, the government has now recently told banks to get ready for the change in the next eight months or so.

The central government has given banks and credit card entities six to eight months to put in place the requisite reporting mechanism and related features to collect tax at source on international credit card transactions.