Here's Why Sending Money To Children Studying Abroad May Cost More For Indian Parents From July 1

Soon, Indian parents may have to shell out more money for children studying abroad.

Changes Proposed In Budget 2023

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Last month, the Union Budget 2023 proposed to raise tax collection at source (TCS) for foreign remittances under the liberalised remittance scheme (LRS) from 5 percent to 20 percent. This will apply to foreign trips, investments overseas, sending money abroad, and other remittances except for education and medical purposes.

However, there are many expenses that parents have to incur for the maintenance of their children who live overseas that may not fall under the category of education expenses with regards to taxation and hence may attract a higher TCS.

Remittance Through Education Loan

At present, under LRS, remittances made for foreign education, via an education loan paid abroad, attract a TCS of 0.5 percent for the amount transferred beyond Rs 7 lakh. This will not change going forward either, as per the ET report.

However, if the source of funding is not an education loan, then money remitted overseas even for the purpose of education attracts TCS at 5 percent if the amount is above Rs 7 lakh.

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At present, TCS of 5 percent is levied on remittances for international education (other expenses not funded by an education loan) that exceed Rs 7 lakh. There is no TCS on remittances below Rs 7 lakh.

However, Budget 2023 has removed the threshold of Rs 7 lakh for all purposes other than education and medical treatment.

As per the new proposal, any remittances to meet the living expenses (and not a direct education expense) of students studying abroad will now face a TCS of 20 percent if the parents fail to establish that the money has been sent for education purposes.

Also Read: From Vacation To Studies Abroad: How A Falling Rupee Impacts Your Finances

Parents Need To Provide Proof

It's true that parents often send money to help children living abroad meet living and various other discretionary expenses. As per the report, if they can prove that money is being sent for educational purposes, a TCS of 5 percent will be levied once the amount exceeds Rs 7 lakh.

The money transferred for hostel expenses or tuition fees can be easily shown. But those who live in flats outside the campus or shared apartments, or rented accommodations might find it difficult to establish the education link.

To send money abroad under LRS, one has to go to the bank, fill out A-2 form and, specify the purpose of the remittance, sign the declaration form. The bank then debits it from the account and remits it abroad. If a parent cannot establish that the fund is being sent for his or her child's overseas education, then the money will be transferred for the "other purpose" and a hefty TCS of 20 percent will apply, the report mentioned.

Transactions between two bank accounts, through debit and forex cards also come under the LRS scheme. However, we need more clarity on how TCS will apply to money remitted abroad via forex cards, according to experts.

What Parents Can Do Before & After July 1st

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This proposal will take effect on July 1, 2023.

Parents can still claim a refund on the extra tax deducted at the time of ITR filing.

Suppose a taxpayer's total remittance is Rs 10,000. At a 20 percent rate, a TCS of Rs 2,000 will apply to the amount. If his/her tax on the total income is Rs 5,000, he/she has to pay only Rs 3,000, and the rest of Rs 2000 will be adjusted against his/her TCS balance. So, as per the report, a taxpayer can offset the amount deducted as TCS against other tax liabilities while filing the income tax return.

Also, parents can transfer some funds in advance until July 1, 2023, when the new rule will come into effect, to help avoid high TCS, said experts.

Also Read: Child's Higher Education v/s Your Retirement: Which One To Prioritize

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