Budget 2023 raised the Tax Collection at Source (TCS) rate for foreign remittances under the Liberalised Remittance Scheme (LRS) from 5 per cent to 20 per cent for select transactions. These new rates will kick in from July 1, 2023. However, the higher rate will not apply to expenses for education and medical purposes.
Let’s understand how the new TCS rule will impact students who are already studying in foreign universities and schools or are planning to study abroad soon.
Under LRS, there will be no TCS on foreign remittances below Rs 7 lakh for educational purposes. The remittances made for overseas education through an education loan paid abroad will attract a TCS of 0.5 per cent beyond a threshold limit of Rs 7 lakh. Under the LRS, the money remitted abroad, not funded by an education loan, for the purpose of education, will attract TCS at 7 per cent if the amount is above Rs 7 lakh in a financial year.
For instance, parents are sending Rs 50,000 to their son studying abroad for his education every month. Since the aggregate amount remitted in a year is Rs 6 lakh, which does not exceed the threshold limit of Rs 7 lakh a year, it will not attract any TCS. However, if the amount crosses the threshold of 7 lakh, it will attract TCS at the rate of 5 per cent.
Sending money abroad for education? Keep this in mind
It is crucial to maintain proper documentation to establish that the money parents are sending is for education. Do keep in mind that the reason for sending money abroad through LRS needs to be mentioned in the remittance form.
“With the recent TCS rule change, it’s essential for students and their families to be aware of the documentation requirements and to prepare accordingly. It’s crucial to have sufficient documentation such as the overseas rental agreement/invoices and admission letter from the university. This ensures the transfer can be considered for the student’s education abroad and falls under the overseas education category, which enjoys concessional TCS rates,” said George Zachariah, CEO, ExTravelMoney.
To ensure that the remittance is for education purposes, parents must use an accurate remittance code in the form, said Ankit Jain, partner at Ved Jain and Associates, a Delhi-based chartered accountancy firm.
“The remitter needs to submit form A2 cum LRS declaration to the bank. In this declaration, they need to specify the purpose of remittance i.e., tuition fees, accommodation fees, travel expenses, or incidental expenses. They also need to provide the student name, student ID, and university name,” said Neeraj Agarwala, Partner, Nangia Andersen India.
For an education loan, the parents need to submit these documents to the bank to claim a lower TCS rate: a) Education loan sanction letter with the student name and parent who is the co-borrower, b) Declaration on the LRS application from the client that the source is from the loan, c) Bank statement showing the source of funds as unutilized disbursed Education loan by a financial, explained Agarwala.
Will 20% TCS apply for additional living expenses for those studying abroad?
Expenses such as tuition fees, hostel fees, exam fees, books, and stationery are usually considered educational expenses and they will automatically attract TCS at a lower rate of 5 per cent if annual remittance amount goes above the annual threshold.
However, parents often send money to help their children meet living and other additional expenses. Will these remittances be considered as other expenses and attract a hefty TCS of 20 per cent? Clearing the confusion around it, the Ministry of Finance mentioned in its FAQs that for the TCS on remittance for travel and incidental expenses related to education, the rates of TCS as applicable to remittances for education will apply, explained Jain. Hence, they will attract TCS at the same rate as remittances for education purpos
“Practical challenges as to how they establish that the funds in-fact have been sent for incidental expenses (such as living expenses) related to education remains to be seen,” Jain added.
How to send higher amount without 20% TCS
For overseas education, a TCS will be charged if the money remitted abroad goes beyond Rs 7 lakh per financial year per person. If a student needs an amount exceeding the threshold of Rs 7 lakh, parents can split the payments and transfer the funds through their immediate family members such as their father, mother, or siblings. By doing so, the amount of each transfer will remain below Rs 7 lakh and meet the expense of the student studying abroad, said Zachariah.
How will TCS apply on forex cards?
If you are using a forex card, often provided by loan providers to meet living expenses abroad, it will attract a hefty TCS of 20 per cent. Further, there is no threshold of Rs 7 lakh on spending through forex cards, unlike debit or credit cards, as of now. So, any amount spent on a forex card will attract TCS at 20 per cent.
How do you get TCS money back?
Do remember that TCS is not a tax by itself. TCS is shown in Form 26AS as a tax credit, which can be claimed against the tax payable while filing an income tax refund (ITR). Individuals can also offset it while filing advance taxes. For those who are not able to offset this amount against taxes payable or any other form, it will be available as a refund after filing ITR.
“In case of a person filing the tax return, it will be a cash flow issue as credit of TCS recovered from the taxpayer, can only be claimed in the tax return (either as adjustment of tax or as a refund of tax),” said Sumit Mangal, Partner, Luthra, and Luthra Law Offices.
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