What Is The Liberalised Remittance Scheme (LRS) And How Does TCS On LRS Affect You

The Liberalised Remittance Scheme (LRS) allows Indian residents to send money abroad for investing in foreign stocks, foreign tours, children's education and foreign medical expenses. According to RBI's LRS scheme, any resident Indian (a person physically present in India for at least 182 days or more than that in a tax year) is eligible to spend up to USD 250,000 per financial year. For monitoring and tracking such outward flows, the Indian government utilises TCS or Tax Collected at Source on LRS. The TCS rate for all types has been updated by the Finance Act of 2023 and came into effect from October 1, 2023, which is now at 20 per cent per year. This is again to bring more transparency, compliance, and compliance control over such transactions.

Changes in TCS Rates

TCS rates are determined by the nature of remittance. So, in the case of education and medical purposes, the TCS rate is imposed on any remittance exceeding Rs. 7 lakh at a 5 per cent level. Also, if the education expenses are funded through a loan, then the rate of TCS becomes 0.5 per cent. In the case of foreign tour packages, the TCS rate has been increased to 20 per cent for any amount exceeding Rs. 7 lakh. For foreign tour packages in India 5 per cent for packages up to Rs. 7 lakh. Also, the TCS rate for LRS transactions for overseas tour packages is at 5 per cent if PAN is processed, and 10 per cent if PAN is not processed. Correspondingly, all remittances outside of investment to LRS now face TCS of 20 per cent from the first hundred rupees onward.

Why the Revision Was Needed

The government overhauled the TCS structure addressing three major objectives: it checks the misuse of LRS for tax evasion purposes; it fosters home expenditure by raising the cost of remittances sent abroad; and it strengthens controls on outward capital flows where such transactions can be brought in line with national economic priorities.

In fact, LRS transactions have increased manifold in recent years. The total amount of outward remittances made in 2021-22 was USD 19.61 billion compared to USD 12.68 billion in the previous year of 2020-21. It reached over USD 27 billion by 2022-23. The willingness of Indians to spend and invest abroad had a multiplier effect. This called for stronger checks that came through the updated TCS framework.

Effect on Individual Taxpayers

Such TCS rates largely and especially affect investment and luxurious tours that would be classified under discretionary remittances. In effect, an amount of Rs. 10 lakh transferred abroad for overseas investments is liable to TCS as Rs. 60,000. While this can offset the entire tax liability, it does not ease cash flow in the way that a refund would be made. In the case of education and medical remittances, the lower rates do help to keep their charges within taxpayers' budgets.

Challenge to Stakeholders

More specifically, the higher rates of TCS pose several challenges. For the people of India, they increase front-end costs and cash flow. Businesses, particularly travel agencies and financial institutions, face operational problems in implementing their new changes while educating their respective clients. Perhaps higher TCS might discourage some genuine remittances, especially from middle-income households.

Adjusting TCS in IT Fillings

First, you will need to add an investment amount from your bank in USD, the bank then will collect TCS on the said investment value. You can make an investment from such an amount in the US stocks. The bank will deposit the collected TCS to the Income Tax Department of India and the collected TCS will be reflected in Form 26AS on a quarterly basis. You can view your Form 26AS after logging into the Income Tax portal using your existing log in credentials. When you are filing Income Tax Returns for the relevant assessment year, the collected TCS will automatically show on the portal which can be adjusted with Income Tax payable. Under the changes introduced in Union Budget 2204, TCS due under LRS can be balanced out against TDS from salary to ensure that taxpayers do not face double taxation on the same income or expenditure. 

The updated TCS structure under LRS is an important strategic move towards more rigorous control over out-going remittances and building up the economic activity internally. Increased rates might cause a momentary nuisance for taxpayers but they would look toward a stronger and clearer financial system in the long run. Comprehension of these finer nuances and subsequent compliance would prove the need for handling the changing regulations for a taxpayer.