Suppose you're transferring any sum of money outside India for any purpose other than health or education. In that case, 20% of that amount will be withheld by the bank and deposited with the government under your name, and you can claim that money when you file your tax returns.?
This is known as Tax Collected at Source (TCS) for foreign remittances. It was earlier at 5% and has increased to 20% of the transaction amount. This increase in TCS rate under the Liberalised Remittance Scheme (LRS) is primarily targeted at high-value discretionary spending.
Basically, remittance is any money you send abroad. Here, inward remittance is when your relative living abroad sends you money (in India); the same is termed outward remittance when you send money (from India) to your relatives living abroad. All these remittances are governed under The Foreign Exchange Management Act (FEMA), 1999, which is overseen by the Reserve Bank of India (RBI).
To guarantee that the rules of India and the receiver nation are followed, it is essential to comprehend the tax ramifications of such transactions. So, let's learn how this money sent to relatives abroad is taxed.
So, money sent abroad for gifts, investments, vacations, and tour packages is subject to the tax rate. However, it does not apply to?medical or educational costs as mentioned above.
For example, if Mr. X wishes to remit $20,000 to his brother or any other relative living abroad, the bank will collect $24,000 (20% of $20,000 is $4,000. So, $24,000 in total) from him. The bank will then send $20,000 to Mr X's brother or relative and deposit the rest $4,000 as TCS.?
In this situation, Mr X's money has been successfully sent to his brother/relative, but his $4000 (Rs. 3,32,000) is deposited with the government in the form of Tax Collected at Source (TCS). Now, Mr X can use this money against his tax liability for that year, or if the tax liability is not that high, then Mr X can claim the amount as a refund after filing his income tax return.??
Basically, when money is sent from India to relatives overseas, the Indian government bases its taxation on the nature of the transaction and the relationship between the sender and the recipient. Here's a more in-depth explanation:
The basic premise is that money transported abroad should be derived from income already taxed in India. If the sender is paying their income (such as salary, business income, rental income, etc.), they must have paid all applicable taxes in India. So, after the income is taxed, the Indian government levies no further tax on the act of remitting money abroad. The sender is not required to pay additional taxes just because they are sending money to another country.
Now, as per the Income Tax Act 1961, gifts given to parents, siblings, spouses, children, and other designated recipients are not subject to taxation. As a result, there is no gift tax in India on money sent to these relatives who live overseas. In the event that the receiver is not a relative as defined by the Act and the amount of money transferred to them surpasses ?50,000 during a fiscal year, it can be subject to taxation under the 'Income from Other Sources' category.
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The Reserve Bank of India (RBI) permits Indian citizens to send up to $250,000 under the Liberalised Remittance Scheme (LRS) annually, which runs from April 1 to March 31. This cap covers the total amount of foreign exchange transactions a person makes in a given year.
The LRS encompasses a broad spectrum of authorised capital and current account activities, such as investments, travel, gifts, contributions, education, healthcare, and upkeep of close family members.
People who use the LRS to send money abroad must ensure that the total amount of transactions they make in a given year does not exceed this cap.
Let's say Priya, an Indian citizen, chooses to give her brother living in Australia ?5,00,000 so he may continue his education. In India, no additional tax is applied to this amount if it comes from her already taxable income. Her brother is an immediate relative, so he qualifies for the gift exemption. Priya must also ensure that the entire amount of her international remittances for the fiscal year, including this sum, does not exceed the $250,000 LRS cap.
Using Priya as an example, let us further clarify the $250,000 restriction under the Liberalised Remittance Scheme (LRS):
The Reserve Bank of India (RBI) developed the LRS, which permits Indian citizens to freely remit up to $250,000 for current account and authorised capital transactions each fiscal year (April 1 to March 31). This cap is cumulative and covers a range of transactions, such as investments, gifts, overseas medical care, travel, and education.
Assume the following Priya's financial transactions occurred during the current fiscal year:
Priya remits ?5,00,000 (about $6,700, given the current exchange rate) to her brother in Australia so that he can further his schooling. She will further allocate $50,000 towards global equities. Priya takes a journey to Europe for $20,000 and spends $100,000 on foreign property.
Let's now determine Priya's total remittance in relation to the LRS limit:
Remittance for education: $6,700
Investment Abroad: $50,000
Travel: $20,000
Purchase of Property: $100,000
$6,700 + $50,000 + $20,000 + $100,000 = $176,700 is the total amount sent.
Recognising the limit under LRS: Priya's total remittances, in this case, come to $176,700, falling under the $250,000 yearly LRS cap. This indicates that she complies with RBI regulations.?Now, Priya would be in breach of the LRS laws and may be subject to financial and legal penalties if her total remittances for the fiscal year exceeded $250,000.
There is a maximum Rs. 7 lakh exemption from TCS if you are transferring money overseas to pay for education. If the funds are being granted through a loan, TCS costs of 0.5% will be imposed for transactions beyond this amount.?
Transactions beyond the maximum level are subject to 5% TCS if any other source of revenue is covering these costs. Additionally, the TCS rate will be 20% if the individual sending the money cannot demonstrate that it is being transferred for educational reasons.
Additionally, if the individual sending the money fails to turn in their PAN card, the TCS rate will go up. In this instance, the TCS rate will rise to 10% for foreign money transfers financed by student loans exceeding the maximum ceiling and 5% for transfers supported by regular income sources.????
Additionally, there would be exemptions for overseas remittances up to Rs. 7 lakh used to pay for medical bills. If the transaction value is more than this, a 0.5% TCS charge will apply.??
For example, Atharv chooses to send his kid to an American institution for his education, spending ?10 lakh. TCS will be applied on ?3 lakh (?10 lakh - ?7 lakh) since the sum exceeds ?7 lakh. Since the TCS rate is 5% and Atharv does not have an education debt, the TCS amount equals 5% of ?3 lakh, or ?15,000. At the time of remittance, the bank will collect this ?15,000, which Atharv may claim as a tax credit.
When TCS is used for any kind of transaction, banks are the ones that get the money. As a result, you can modify your total TCS based on your tax obligation.??
For example, you send Rs. 5 lakh to a relative who lives abroad. In such a case, there would be a TCS of Rs. 1 lakh. Upon filing your IT returns, you discover that you owe Rs. 2.5 lakh in taxes. In certain situations, you can alter your tax amount with the due TCS to lower it.?
Your net tax obligation will thus be lowered to Rs. 1.5 lakh. Banks typically give a TCS certificate at the time of deduction. When filing your income tax returns, you can utilise it to request TCS reimbursements.?
You can now request a refund for the deducted TCS if you do not have taxable income. Furthermore, if the entire amount of your tax burden is less than the TCS amount, you are still responsible for the same. Form 26AS will show the TCS gathered on the sender's behalf.
Comprehending the tax regulations governing funds transferred from India to overseas family members under the Liberalised Remittance Scheme (LRS) necessitates grasping many crucial elements. The TCS is a component of the sender's tax burden rather than an extra tax, even if it is a source of tax collection. High-value discretionary expenditure is monitored and properly taxed thanks to this approach.
To prevent unnecessary tax obligations, it is essential to comprehend the exemption limitations and the nature of the relationship between the sender and receiver when it comes to gifts and other remittances to family members.?
Further, individuals must be aware of these rules to make educated judgements regarding their international remittances. For compliance and financial planning, it is crucial to understand the tax ramifications and the legal framework under FEMA, regardless of the purpose—education, healthcare, investments, or assisting family members overseas.
Finally, the way the Indian government taxes remittances essentially combines regulatory supervision with the easing of international trade. Although the higher TCS rate may appear strict, it aligns with international norms and general economic regulations, guaranteeing responsibility and openness in cross-border financial transactions. As always, anyone involved in these kinds of transactions should keep themselves informed and seek advice from financial professionals to successfully negotiate these intricate restrictions to avoid any unnecessary tax liability.
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