Lower tax collected at source rate on funds remitted for education

But a higher rate will be levied if PAN isn't furnished

A new income-tax (I-T) rule on foreign exchange transactions came into effect from October 1. The Government of India, through the Finance Act, 2020, inducted new provisions, enabling levy of 5 per cent tax collected at source (TCS) on foreign remittances above Rs 7 lakh in a financial year. 

This new sub-section (1G) in Section 206C provides for levy of TCS on foreign remittances under the liberalised remittance scheme (LRS). TCS will be collected unless tax has already been deduc­ted at source (TDS) on that amount.  

This provision has been imposed on foreign visits for two reasons. 

Says Suresh Surana, founder, RSM India: “It will enable the government to keep close tabs on the amount remitted to a foreign jurisdiction.” It will also prevent tax evasion. A businessman may not file returns, but goes on a foreign tour every year with his family. 

Adds Surana: “It may bring such people into the tax net who incur huge expenditure on foreign travel, but do not file tax return, or pay I-T that is not commensurate with the expenses they incur on foreign travel.” 

Foreign tours

The tax shall be collected on the amount or aggregate of the amount in excess of Rs 7 lakh if the remittance is made for any purpose other than for the purchase of an overseas tour package. If the remittance is made for the purchase of an overseas tour package, then the threshold limit of Rs 7 lakh shall not apply, and tax shall be collected on the total amount remitted. 

If a person does not furnish his permanent account number (PAN), then TCS will be collected at the rate of 10 per cent. 

Says Vivek Jalan, partner at Tax Connect Advisory Services: “If a person makes remittance under LRS and in the same financial year, purchases an overseas tour package, will the limit of Rs 7 lakh be subsumed if foreign currency is purchased for the overseas tour package? The answer is ‘no’; the limit shall not be subsumed.” 

Study overseas

For students planning to go abroad for studies and have taken an education loan from a financial institution, the rate of TCS shall be 0.5 per cent on the amount exceeding Rs 7 lakh. The amount being remitted should have been sourced from an education loan as defined in Section 80E. If the person does not furnish his PAN, TCS shall be collected at the rate of 5 per cent. 

Says Rana: “The government has fixed the TCS rate at 0.5 per cent to help students in case of educational remittances, so as to not make a big dent in their finances.” 

If money is remitted under LRS for any other purpose, TCS will be collected at 5 per cent if the person furnishes his PAN, and at 10 per cent if he does not.

Any TCS paid will reflect in Form 26AS and credit for it can be claimed while filing the tax return. If there is no tax liability, the sum can be collected as refund. 

Finally, as Kapil Rana, founder and chairman, HostBooks, advises: “People should be ready with all the evidence and proof of source of funds, and purpose of travel to avoid tax litigation.”