The Interim Union Budget 2024 presented by Union Finance Minister Nirmala Sitharaman proposed to formalise the hiked Tax Collected at Source (TCS) rates for foreign remittances under the Liberalised Remittance Scheme (LRS) by an amendment to Section 206C of the Income Tax Act.
Any person, authorized dealer receiving funds for remittance out of India under the Liberalised Remittance Scheme, or a seller of an overseas tour package receiving payment from a buyer, must collect 5% of the amount as income tax at the time of debiting the buyer or receiving the payment, whichever comes first.
Section 206C of Income Tax Act 1961 deals with the provisions of tax collection at source (TCS) by certain sellers from certain buyers. TCS is a mechanism to collect tax at the source from the buyers of specified goods or services.
Section 206C of the Income-Tax Act 1961 provides for TCS in the business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1G) of section 206C of Income Tax Act provides for TCS on foreign remittance through the Liberalised Remittance Scheme and on the sale of overseas tour packages. Only such remittances which are covered under LRS are liable to TCS.
The objective of TCS is to ensure that the government gets its revenue at the earliest point of time and also to track transactions of high value. The seller who collects the tax must deposit it with the government and file quarterly returns. The buyer who pays the tax can claim credit for it while filing his income tax return.
In Budget 2023, TCS for foreign remittances under LRS was raised from 5% to 20%.
The press release on 28th June, 2023 clarified the Important changes w.r.t Liberalized Remittance Scheme (LRS) and Tax Collected at Source (TCS).
The press release is reproduced here for convenience:
“In the Budget this year, certain changes were announced to the system of Tax Collection at Source (TCS) on payments under the Liberalised Remittance Scheme (LRS) and on overseas tour program packages. These were to take effect from 1st July 2023. It was also announced in March that credit card payments would be brought under the LRS. Numerous comments and suggestions were received which have been carefully considered.
In response to the comments and suggestions it has been decided to make suitable changes. Firstly, it has been decided that there will be no change in the rate of TCS for all purposes under LRS and for overseas travel tour packages, regardless of mode of payment, for amounts up to Rs. 7 lakh per individual per annum. It has also been decided to give more time for the implementation of the revised TCS rates and for inclusion of credit card payments in LRS. The changes are detailed below.
Sub-section (1G) of section 206C of the Income-tax Act, 1961 (“the Act”) provides for Tax Collection at Source (TCS) on (i) foreign remittance through the Liberalised Remittance Scheme (LRS) and (ii) sale of overseas tour program package.
Through the Finance Act 2023, amendments were carried out in sub-section (1G) of section 206C of the Act. These amendments, inter alia, increased the rate of TCS from 5% to 20% for remittance under LRS as well as for purchase of overseas tour program package and removed the threshold of Rs 7 lakh for triggering TCS on LRS. These two changes were not applicable when the remittance is for education or medical purposes. These amendments were to take effect from 1st July 2023.
The Government had notified Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 vide an e-gazette notification dated 16th May 2023 to remove the differential treatment for credit cards vis à vis other modes of drawal of foreign exchange under LRS.
After discussions with various stakeholders, and taking into account comments and suggestions received, the following decisions have been taken:
i) To give adequate time to Banks and Card networks to put in place requisite IT based solutions, the Government has decided to postpone the implementation of its 16th May 2023 e-gazette notification. This would mean that transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS. The Press Release dated 19th May 2023 stands superseded.
ii) Threshold of Rs. 7 Lakh per financial year per individual in clause (i) of sub-section (1G) of section 206C shall be restored for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose: Thus, for first Rs 7 Lakh remittance under LRS there shall be no TCS. Beyond this Rs 7 Lakh threshold, TCS shall be
a) 0.5% (if remittance for education is financed by education loan);
b) 5% (in case of remittance for education/medical treatment);
c) 20% for others.
For purchase of overseas tour program packages under Clause (ii) of Sub-section (1G), the TCS shall continue to apply at the rate of 5% for the first Rs 7 lakhs per individual per annum; the 20% rate will only apply for expenditure above this limit.
iii) Increased TCS rates to apply from 1st October, 2023: The increase in TCS rates; which were to come into effect from 1st July, 2023 shall now come into effect from 1st October, 2023 with the modification as in (ii) above. Till 30th September, 2023, earlier rates (prior to amendment by the Finance Act 2023) shall continue to apply.
Earlier and new TCS rates are summarized as under:
| Nature of payment (1) | Earlier rate before Finance Act, 2023 (2) | New rate wef 1st October 2023 (3) |
| LRS for education financed by loan | Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh | Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh |
| LRS for Medical treatment/ education (other than financed by loan) | Nil upto Rs 7 lakh 5% above Rs 7 Lakh | Nil upto Rs 7 lakh 5% above Rs 7 Lakh |
| LRS for other purposes | Nil upto Rs 7 lakh 5% above Rs 7 Lakh | Nil upto Rs 7 lakh 20% above Rs 7 Lakh |
| Purchase of Overseas tour program package | 5% (without threshold) | 5% till Rs 7 Lakh, 20% thereafter |
Note: (i) TCS rate in column two shall continue to apply till 30th September, 2023.
(ii) There shall be no TCS on expenditures under LRS under clause (i) of Sub-section (1G) for the first Rs. 7 lakh, irrespective of purpose.
The necessary changes to the Rules (Foreign Exchange Management (Current Account Transactions Rules), 2000) are being issued separately.”
Section 8 of the Finance Bill 2024, stated as follows, proposing to formalise the hike in TCS Rates:
“. In section 206C of the Income-tax Act, in sub-section (1G),––
(a) in the long line, for the word “twenty”, the word “five” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July, 2023;
(b) in the first proviso, the words “and is for the purposes of education or medical treatment” shall be omitted and shall be deemed to have been omitted with effect from the 1st day of July, 2023;
(c) in the second proviso, with effect from the 1st day of October, 2023,––
(i) for the word “five”, the word “twenty” shall be substituted and shall be deemed to have been
substituted;
(ii) for the words “is for the purposes of”, the words “is for purposes other than” shall be substituted and shall be deemed to have been substituted;
(d) after the third proviso, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of October, 2023, namely:––
“Provided also that the seller of an overseas tour programme package shall collect a sum of twenty per cent of the amount or aggregate of amounts in excess of seven lakh rupees received from the buyer in a financial year:”;
(e) after the fifth proviso, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of July, 2023, namely:––
Amendment of section 206C
“Provided also that the sum to be collected under this subsection on or after the 1st day of July, 2023 and before the 1st day of October, 2023, shall be collected in accordance with the provisions of this sub-section as they stood on the 1st day of April, 2023.”.
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