This is an in-depth look into the applicability of the provisions relating to Tax Collection at Source (TCS) introduced by Government of India vide Finance Act, 2020. Banks and Authorized Dealers (Fly Wire/Western Union) have been lately notifying clients about changes made to their processes.

This note aims to apprise our client on details about TCS and how it will impact Indian students who wish to transfer funds to foreign countries for their education or living expenses post October 1, 2020.

According to the Reserve Bank of India (RBI) under Liberalised Remittance Scheme (LRS), an individual is allowed to remit up to $2,50,000 USD in a financial year from April to March. As per Finance Act 2020, Tax Collection at Source (TCS) will be levied on foreign remittances made through LRS, including the amount transferred to a foreign university for payment of tuition fees or to meet living expenses.

From October 1, Indian students will be required to pay TCS on foreign remittance exceeding the specified limit. The new tax is not applicable to foreign educational institutions, but is the responsibility of Banks and Authorised Dealers who are expected to collect this new tax on foreign remittance exceeding the specified limits. TCS is not an additional tax, but is more in the nature of advance income tax, for which the remitter must obtain a TCS certificate and claim credit against actual income tax liability.

New provisions of TCS u/s 206 (1G):

Tax Rates

TCS rate will be 5% on foreign remittances above the specified limits, if Permanent Account Number (PAN) or Aadhaar (national registration system) details are provided.

In the scenario that PAN or Aadhaar details are not provided, the TCS will be levied at a higher rate of 10%.

For remittance made on education loans for higher education abroad, the TCS rate will be 0.5% applicable above the specified limits.

Applicability to TCS

Under LRS, resident individuals, including minors, are allowed to remit up to $250,000 USD per financial year (April to March) to another country for any investment or to meet expenses related to studying, opening of GIC, travelling, medical, among others.

TCS is applicable on foreign remittances if the total amount exceeds INR 700,000 (approx. 14,000 CAD) in a financial year. If the remittance amount is less than INR 700,0000 (14,000 CAD) in a fiscal year, no TCS is applicable.

Calculation: In the case of a parent/student who remitted INR 1,000,000 (approx. 20,000 CAD) in a fiscal year from India for the payment of tuition fees, living and other expenses. TCS of 5% will be applicable on INR 300,000 (approx. 6000 CAD) i.e. INR 1,000,000 minus INR 700,000. In case the above amount is remitted through an education loan, the rate of TCS shall be 0.5% on INR 300,000 (approx. 6000 CAD).

Impact on Indian students seeking an education abroad

• Parents/students should budget for TCS while doing their financial planning for any higher education abroad. The overall cost of pursuing foreign education will increase for students due to applicability of TCS.
• Even meritorious students financially supported by organisations/Govt./NGOs to pursue their higher education abroad will be required to pay TCS on financial aid.
• Students will most likely prefer to take Education Loans instead of arranging funds from relatives or friends. TCS on funds remitted through education loans from financial institutions is at lower rate of 0.5%.
• In case of visa refusals, students need to claim the TCS amount as a refund or set-off against their tax liability.
• Regular income taxpayers will not face much of an impact, except for a temporary cash outflow. But it will have a bearing on non-taxpayers who have to file tax returns and get the TCS refund subsequently.
• Most students are not income tax payees. Those planning to pay for their education after October 1 should also apply for PAN cards if they plan to take tax credit for TCS.

 To gauge their reaction, MLEC reached out to agents in India for their feedback on the new tax rule. Agents generally did not express much concern about the tax, and didn’t think it would effect student numbers from India. However, they pointed out that it will definitely increase paperwork for students and funds transfer will now take longer to process. TCS, according to them, will be just an added burden on students due to advanced cash outflow. Agents see it as necessary requirement for funds transfer, like many pre-existing ones. They advise staff to stay updated and inform students at the time of counselling to apply for a permanent account number and refund process.

We hope you find the information shared informative and useful to understanding the new tax rule in India.