Rationalizing TCS on LRS: A Key Reform for Budget 2025

Background

In a move to strengthen fiscal oversight and streamline foreign exchange transactions, the Indian government introduced Tax Collected at Source (TCS) on remittances made under the Liberalized Remittance Scheme (LRS), which route is available to resident Indians. This regulatory change aimed to enhance transparency and accountability in cross-border financial activities while aligning with global taxation practices. 

In this article, we delve into the TCS applicability on LRS transactions, exploring its rationale, current rates, and expected changes pertaining to the same in the upcoming Budget 2025 announcements.

Understanding the current TCS Provisions and Rates

Tax Collected at Source (TCS) is the tax collected by the seller or service provider from the buyer at the time of sale or provision of service. It is levied to track certain transactions and to ensure tax compliance.

The Liberalized Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), permits resident individuals to remit a specified amount of money during a financial year for permissible current or capital account transactions. These transactions include education, medical treatment abroad, purchase of property, investments in foreign stocks, etc.

The various remittances subject to Tax Collected at Source (TCS) under section 206C include:

Remittances made under the Liberalized Remittance Scheme (LRS) for:

Education:

According to section 206C(1G) of the Income Tax Act, an authorized dealer is required to collect 0.5% of the amount exceeding Rs. 7,00,000 per financial year from individuals making remittances outside India under LRS for educational loans from recognized financial institutions or approved charitable institutions mentioned under section 80E of the IT Act. If the educational loan is from an institution not covered under section 80E or for other educational purposes, the TCS rate is 5% on the amount exceeding Rs. 7,00,000.

Medical:

An authorized dealer must collect 5% TCS from individuals who remit amounts exceeding Rs. 7,00,000 per financial year outside India under LRS for medical treatment.

Any other purpose:

Previously, the TCS rate was 5% on remittances exceeding Rs. 7,00,000 per financial year. Post amendment by the Finance Act, 2023, the rate was increased to 20% without any threshold from 1 July 2023. However, practical difficulties led to restoration of Rs. 7,00,000 threshold for all categories of LRS payments through a Ministry of Finance press release dated 28 June 2023. The increased rate came into effect from 1 October 2023 instead of 1 July 2023.

Travel:

Following the Ministry of Finance's press release on 28 June 2023, the TCS rate remained at 5% for remittances up to Rs. 7,00,000 per individual per financial year for purchase of overseas tour packages.

The applicable TCS rates for LRS remittances are tabulated as below:

Further, it is pertinent to note that the government has decided to postpone the inclusion of international credit card transactions under the Liberalized Remittance Scheme (LRS) until further notice. Consequently, such transactions are currently exempt from the provisions of Tax Collected at Source (TCS) under section 206C(1G) of the Income Tax Act.

Need for Rationalising the high TCS rate of 20%

The 20% TCS rate on non-essential remittances under the Liberalized Remittance Scheme (LRS) has raised significant concerns due to its far-reaching financial and economic implications. A high upfront tax rate blocks a substantial portion of funds at the time of remittance, creating liquidity challenges, particularly for middle-income individuals. This blockage of funds not only increases the immediate cost of remittance but also discourages legitimate discretionary expenses such as overseas investments, travel, etc.

Furthermore, the global competitiveness of India's financial system could be adversely impacted. In an increasingly interconnected world, individuals and businesses frequently engage in cross-border financial activities. By imposing a steep TCS rate, India risks discouraging such legitimate international transactions, potentially making its financial ecosystem less attractive compared to countries with simpler and less costly systems for foreign remittances.

While the TCS amount is available for adjustment or refund during the income tax return filing, the process may be delayed, intensifying liquidity concerns and inconveniencing taxpayers. Additionally, the economic opportunity cost of blocked funds is significant, as these could otherwise be directed towards productive activities like investments or consumption that contribute to domestic growth.

There is also a risk that such high rates could encourage individuals to explore alternative informal routes for cross-border transactions, which would undermine the government’s objective of promoting transparency and compliance. Rationalizing the 20% TCS rate to a more reasonable level could alleviate these challenges, ensuring smoother financial operations for taxpayers while maintaining the government's ability to monitor and regulate foreign remittances effectively.

Budget Expectations for Rationalising the TCS Rate 

Lowering the TCS rate to 5% (from 20%) in such cases would reduce the amount of funds blocked initially, thereby improving liquidity for taxpayers. By reducing the TCS rate, the government may still be able to effectively monitor and manage high-value foreign exchange transactions for tax compliance.