The Finance Act 2020, new Income Tax provisions have been introduced on all forex transactions under LRS (Liberalised Remittance Scheme) from 1st Oct'2020.

Here are the new provisions as per ‘The Finance Act, 2020’:

Frequently Asked Questions (FAQs):

1. What is Liberalised Remittance Scheme (LRS)?

Under this Scheme, all resident individuals, including minors, are allowed to freely remit / avail foreign exchange facility up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

2. What is the new tax implication on all forex transactions under LRS?

TCS at 5% shall be applicable on all forex transactions under LRS, exceeding INR 7 lakhs in a financial year (Except, i) Transfers from Resident Individual Account to NRO Account towards gift / loan, wherein TCS is NOT applicable AND ii) Remittances towards overseas education made out of loan obtained from a financial institution, for which TCS at 0.5% will be applicable).

For instance, if the total foreign exchange facility availed under LRS in a financial year is INR 10,00,000, TCS at 5% will be applicable on INR 3,00,000 (INR 10,00,000 - INR 7,00,000) and tax collected will be INR 15,000. If subsequent LRS transaction initiated is INR 2,00,000, TCS @ 5% will be applicable on INR 2,00,000 and tax collected will be INR 10,000.

3. What is the tax implications for transfers to NRO Account towards Gift / Loan, under LRS, by Resident Indian?

TCS will NOT be applicable and the amount remitted will not be subsumed while considering the threshold limit of INR 7 lakhs per Financial Year.

4. What is the new tax implication on remittances for pursuing overseas education?

TCS at 0.5% shall be applicable on the amount exceeding INR 7,00,000 in a financial year under LRS, if the amount remitted is obtained out of a loan from a Financial Institution for pursuing education.

For instance, if the total amount remitted under LRS in a financial year is INR 10,00,000 for pursuing overseas education, TCS at 0.5% will be applicable on INR 3,00,000 (INR 10,00,000 - INR 7,00,000) & tax collected will be INR 1,500.

(Note: The threshold limit of INR 7 lakhs mentioned in FAQs 2 & 3 is a consolidated threshold limit).

5. What is the tax implication if the amount remitted for pursuing overseas education is Owned Funds (not a loan availed)?

TCS at 5% shall be applicable on remittances exceeding INR 7 lakhs in a financial year under LRS.

6. What is the tax implication for remittances to Foreign Tour Operator under LRS?

TCS applicable will be at 5% of the total amount remitted and the amount remitted will not be subsumed while considering the threshold limit of INR 7 lakhs limit.

For instance, if the amount remitted is INR 5,00,000, TCS at 5% will be applicable and tax collected will be INR 25,000.

7. What is the effective date of the new income tax provision?

The new TCS provision will be effective from October 1, 2020.

8. Which transactions are included in threshold limit of INR 7 lakhs, above which TCS shall be applicable?

All forex transactions under LRS will be included in threshold limit of INR 7 lakhs except i) Transfers from Resident Individual Account to NRO Account towards Gift / Loan and 2) Remittances to Foreign Tour Operators.

9. How TCS will be calculated?

Below illustration explains how TCS will be calculated if Mr. XYZ avails foreign exchange facility for different purposes under LRS as listed below.

A – Remittances towards Overseas/ Foreign tour programme package
B – Remittances for pursuing overseas education
C – Other LRS Remittances
D – Transfers to NRO Account under Gift / Loan

Illustration I: TCS calculation if the Mr. XYZ has not utilized the threshold limit of INR 7 Lakhs per FY before October 1, 2020