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Last updated: July 6th, 2023 9:10 AM

Changes Announced to Liberalized Remittance Scheme (LRS) and Tax Collected at Source (TCS)

In the recent Budget 2023, significant changes were announced regarding the system of Tax Collection at Source (TCS) on payments made under the Liberalised Remittance Scheme (LRS) and overseas tour program packages. However, in response to comments and suggestions received from various stakeholders, the government has carefully considered the feedback and made suitable revisions to the initial proposals. This article explores the Changes Announced to Liberalized Remittance Scheme (LRS) and Tax Collected at Source (TCS).

Liberalized Remittance Scheme (LRS)

The Liberalized Remittance Scheme (LRS) is a framework established by the Reserve Bank of India (RBI) that allows residents of India to remit funds abroad for various purposes. Under this scheme, individuals can transfer money outside the country within a financial year. The LRS facilitates foreign investments, education-related expenses, medical treatment, tourism, and other permissible activities.

Tax Collected at Source (TCS)

Tax Collected at Source (TCS) is a tax collection mechanism implemented by the Indian government to collect taxes at the source of specific transactions. It is an indirect tax form where the person making the payment collects the tax from the recipient and deposits it with the government.

Changes to TCS on Foreign Remittances through LRS in Budget 2023

The Budget 2023 has introduced changes to the Tax Collection at Source (TCS) on foreign remittances made through the Liberalized Remittance Scheme (LRS). Starting from July 1, 2023, the TCS rate has been increased to 20 percent from the previous 5 percent, with certain exceptions. Under the LRS, individuals are allowed to remit up to $250,000 in a financial year for various purposes such as travel, business trips, employment abroad, medical expenses, education, gifts or donations, emigration, maintenance of close relatives, and other current account transactions as per the Foreign Exchange Management (CAT) Rules, 2000.

No Change in TCS Rate for LRS and Overseas Travel Packages

The TCS rate for the Liberalized Remittance Scheme (LRS) and overseas travel packages remain unchanged, emphasizing stability. As part of the modifications, it has been decided to retain the current TCS rate for all LRS purposes and overseas travel tour packages, regardless of the payment method, as long as the amount does not exceed Rs. 7 lahks per individual per annum. This decision ensures that there will be no alterations to the TCS rate for these transactions within the specified threshold, providing consistency for taxpayers.

Extended Implementation Timeline for Revised TCS Rates and Credit Card Payments

A previous announcement in March stated that credit card payments would be incorporated into the scope of the Liberalized Remittance Scheme (LRS). However, recognizing the necessity for banks and card networks to establish the required IT-based solutions, the government has decided to postpone the implementation of this provision. Consequently, transactions conducted overseas using international credit cards will not be considered LRS transactions and will not be subjected to Tax Collection at Source (TCS). This postponement grants additional time for the necessary preparations, ensuring a smoother integration of credit card payments into the LRS framework.

Threshold Restoration for TCS on LRS Payments

The revised regulations bring about the restoration of the threshold for Tax Collection at Source (TCS) on all categories of Liberalized Remittance Scheme (LRS) payments, regardless of their purpose. Individuals can now avail themselves of a threshold of Rs. 7 lahks per financial year per person, wherein no TCS will be imposed. However, once the remittance amount exceeds this threshold, the applicable TCS rates will vary based on the purpose of the remittance. The revised TCS rates are as follows:

0.5% TCS rate for remittances made for educational purposes if financed through an education loan.
5% TCS rate for remittances made for education or medical treatment.
20% TCS rate for remittances made for all other purposes.

This revision in the TCS rates ensures a fair and balanced approach towards taxation, considering the remittance's specific purpose. The table below summarizes the earlier and new TCS rates:

Nature of payment	Earlier rate before Finance Act, 2023	New rate wef 1st October 2023
LRS for education financed by a loan	Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh	Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh
LRS for Medical treatment/ education (other than financed by loan)	Nil upto Rs 7 lakh 5% above Rs 7 Lakh	Nil upto Rs 7 lakh 5% above Rs 7 Lakh
LRS for other purposes	Nil upto Rs 7 lakh 5% above Rs 7 Lakh	Nil upto Rs 7 lakh 20% above Rs 7 Lakh
Purchase of Overseas tour program package	5% (without threshold)	5% till Rs 7 Lakh, 20% thereafter

These changes provide clarity and a structured framework for taxpayers, allowing them to navigate the LRS system quickly and safely.

Revised Implementation Date for TCS Rate: Effective from October 1, 2023

The initially planned date of July 1, 2023, for implementing the increased Tax Collection at Source (TCS) rates has been rescheduled. The revised date for the new TCS rates to effect is now October 1, 2023. Until September 30, 2023, the previous TCS rates, as per the regulations before the amendment by the Finance Act 2023, will continue to be applicable.

Conclusion

The changes announced in the budget regarding Tax Collection at Source (TCS) on payments under the Liberalized Remittance Scheme (LRS) and overseas tour program packages have been revised to address the concerns and suggestions received from stakeholders. The decision to maintain the current TCS rate for transactions within the Rs. 7 lakh threshold under LRS provides relief to individuals. At the same time, the extension of the implementation timeline allows more time for the necessary preparations. Including credit card payments in LRS ensures a level playing field for all modes of foreign exchange drawl. These adjustments demonstrate the government's responsiveness to feedback and commitment to providing taxpayers' smooth transition. Stay updated with the latest circulars, FAQs, and legislative amendments to effectively comply with the revised regulations.