New TCS rate from July: Sending money for children studying abroad to cost more for these expenses

Soon, parents may have to shell out more money for kids studying abroad. Union Budget 2023 proposed to raise tax collection at source (TCS) for foreign remittances under the liberalised remittance scheme (LRS) from 5 per cent to 20 per cent. This will apply to foreign trips, investing overseas, sending money abroad, and other remittances except for education and medical purposes. However, there are many expenses which parents have to incur for maintenance of their children who live overseas, which may not fall under the category of education expense with regards to taxation and hence, may attract higher TCS.

Remittance through education loan towards foreign education
At present, under LRS, remittances made for foreign education, via an education loan paid abroad, attract a TCS of 0.5 per cent for the amount transferred beyond Rs 7 lakh. This will not change going forward either. However, if the source of funding is not education loan, then money remitted overseas even for the purpose of education attracts TCS at 5 per cent if the amount is above Rs 7 lakh.

20% TCS on funding other expenses related to foreign education
At present, a TCS of 5 per cent is levied on the remittances for international education (other expenses not funded by an education loan) that exceed Rs 7 lakh. There is no TCS on remittances below Rs 7 lakh. “Budget 2023 has removed the threshold of Rs 7 lakh for all purposes other than education and medical treatment,” said Maneet Pal Singh, Partner, I.P. Pasricha & Co, a chartered accountant firm in Delhi.

As per the new proposal, any remittances towards meeting the living expenses (not a direct education expense) of students studying abroad will now face a TCS of 20 per cent, if the parents fail to establish that the money has been sent for education purposes.

Parents need to provide proofs for education expenses for lower TCS at 5 per cent
Parents often send money to help children living abroad to meet living and various other discretionary expenses. If they can prove that money is being sent for education purposes, a TCS of 5 per cent will be levied once the amount exceeds Rs 7 lakh.

The money transferred for hostel expenses or tuition fees can be easily shown. “If your child stays in the hostel of the university, you can establish that it is for the educational purpose. Then, a TCS of 5 per cent will be applicable if the remittances are above Rs 7 lakh,” said Vivek Jalan, Tax Connect Advisory. But those who live in flats outside the campus or shared apartments or rented accommodations might find it difficult to establish the education link, Jalan added.

To send money abroad under LRS, one has to go to the bank, fill up A-2 form and specify the purpose of the remittance and sign the declaration form. The bank then debits it from the account and remits it abroad. If a parent cannot establish that the fund is being sent to his or her child’s overseas education, then the money will be transferred for the ‘other purpose’ and a hefty TCS of 20 per cent will apply, Jalan said.

Transactions between two bank accounts, through debit and forex cards also come under the LRS scheme, said Rajiv Chugh, Leader – Policy Advisory & Specialty Services, EY India. However, we need more clarity on how TCS will apply to money remitted abroad via forex cards, said experts.

‘TCS hike to increase cashflow burden temporarily’
This proposal will come into effect from July 1, 2023. “TCS is not a tax by itself, and credit of the amount of TCS paid on any transaction is available to the person who has paid the amount of TCS to adjust against her tax liability for the financial year,” said Sanjeev Sachdeva, Partner, Luthra and Luthra Law Offices India.

Suppose a taxpayer’s total remittance is Rs 10,000. At 20 per cent rate, a TCS of Rs 2,000 will apply to the amount. If his tax on the total income is Rs 5,000, he has to pay only Rs 3,000 and the rest Rs 2000 will be adjusted against TCS balance. So, a taxpayer can offset the amount deducted as TCS against other tax liabilities while filing the income tax return.

“The increase from 5 per cent to 20 per cent in the rate of TCS would significantly increase the burden on any person remitting funds under the LRS scheme, even though the amount of TCS will be available for adjustment against the tax liability” Sachdeva added.

“In case of a person filing the tax return, it will be a cash flow issue as credit of TCS recovered from him can only be claimed in the tax return (either as adjustment of tax or as a refund of tax),” said Sumit Mangal, Partner, Luthra and Luthra Law Offices.

“Although taxpayers will get a deduction/refund of this amount while filling ITR, this move will impact the cash flow and might not be encouraging for people to take benefit of LRS,” said Maneet Pal Singh. Parents can transfer some funds in advance till July 1, 2023, when the new rule will come into effect, to help to avoid high TCS, said experts.

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