The Budget 2023 brought significant changes to the tax collected at source (TCS) on foreign remittances, affecting those investing in international stocks, real estate abroad, bonds, and foreign company stocks. Starting October 1, 2023, a 20% TCS will be imposed on foreign remittances exceeding Rs 7 lakh in a financial year. This article explores the implications of the new TCS rule and provides insights on how investors can navigate this change.
Key Points at a Glance
| Topic | Summary |
|---|---|
| New 20% TCS Rule | Effective October 1, 2023, a 20% TCS will apply to foreign remittances exceeding Rs 7 lakh, impacting international investments. |
| Previous TCS Rates | Previously, there was no TCS on remittances up to Rs 7 lakh. Investments exceeding this limit incurred a 5% TCS under the Liberalised Remittance Scheme (LRS). |
| Implications for Investors | Indian residents investing directly in foreign assets may face a cashflow crunch, with 20% TCS deducted by banks. |
| TCS Is Not Additional Tax | TCS can be adjusted against income tax liability when filing an income tax return (ITR) or refunded if no tax liability exists. |
| Exemptions from TCS | TCS won’t apply if an individual remits less than Rs 7 lakh in a year. Families can utilize this limit for each member. Additionally, investments through international mutual funds based in India are exempt from TCS. |
| Claiming TCS Refunds | To claim TCS refunds, ensure TCS is reflected in Form 26AS, maintain bank transaction notes, and file income tax returns. Tax collectors issue Form 27D as proof for claiming deductions. |
| Cash Flow Considerations | Advance tax payers can offset 20% TCS against their payments. However, salaried individuals may face cash flow issues, waiting for refunds until the return filing date. |
The Indian government has enacted a significant alteration to the taxation of foreign remittances in the 2023 Budget. Commencing on October 1, 2023, a Tax Collected at Source (TCS) rate of 20% will be levied on foreign remittances surpassing Rs 7 lakh in a fiscal year. This modification will have a notable impact on individuals who invest in international stocks and various other assets located overseas.
Previous TCS Rates
Before the implementation of this new rule, there was no Tax Collected at Source (TCS) imposed on foreign remittances of up to Rs 7 lakh within a year. However, if an individual sent an amount exceeding this threshold for the purpose of investing in foreign securities through the Liberalised Remittance Scheme (LRS), a TCS rate of 5% was applicable.
Implications for Investors
Let’s consider an Indian resident interested in making a direct investment in US stocks. Suppose they have already committed Rs 7 lakh to their financial portfolio in the current fiscal year and intend to add an additional Rs 1 lakh to their overseas brokerage account. In this scenario, they will encounter a TCS deduction. When they transmit Rs 1 lakh to their brokerage account via a bank, the bank will apply a TCS deduction of Rs 20,000, leaving them with only Rs 80,000 in the brokerage account. Consequently, in order to purchase shares valued at Rs 1 lakh, they will need to deposit Rs 1.25 lakh, as the bank will retain Rs 25,000 as TCS (equivalent to 20% of Rs 1 lakh).
TCS Is Not Additional Tax
It’s important to emphasize that TCS does not function as an extra income tax. The deducted TCS sum can be offset against your income tax obligation when you file your income tax return (ITR). In situations where you have no tax liability, you can request a refund for the TCS amount. Nevertheless, it’s worth noting that this process may result in a temporary cash flow constraint, as the refunded amount might remain inaccessible until the refund is processed.
Exemptions from TCS
The updated TCS regulation features certain exemptions. If an individual remits less than Rs 7 lakh within a year, TCS will not be levied. Moreover, families can utilize this threshold individually for each family member. Another avenue to explore for investing in international markets without facing TCS implications is to consider international mutual funds based in India. These funds focus on foreign company stocks and are exempt from TCS.
Claiming TCS Refunds
To get back the TCS money you paid when filing your taxes, make sure that the TCS amount is shown in Form 26AS. Keep records of your bank transactions that show the same amount of money you sent and the TCS that was taken, and also save the receipts when you buy shares. The tax collectors will give you a Form 27D, which you can use as evidence when you want to claim deductions.
Cash Flow Considerations
For people who already pay their taxes in advance, the new 20% TCS on foreign remittances over Rs 7 lakh might not be a big problem because they can use this money to cover their advance tax payments. But if you’re someone who earns a salary, you might encounter some difficulties with your cash flow because you’ll have to wait until it’s time to file your tax return to get back the extra TCS money you paid.
In conclusion, the new 20% TCS on foreign remittances starting October 1, 2023, introduces changes that impact international investors. Understanding the rules, exemptions, and the process for claiming TCS refunds is crucial for effectively managing your investments in foreign assets.
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