TCS on Foreign Remittance — Section 206C(1G)
Section 206C(1G) of the Income Tax Act, 1961 mandates collection of Tax Collected at Source (TCS) by authorised dealers on foreign remittances under the Liberalised Remittance Scheme and on sale of overseas tour programme packages, with rates varying by purpose and enhanced significantly from 1 October 2023.
Section 206C(1G) was introduced by the Finance Act 2020 to bring foreign remittances under the TCS ambit, enabling the tax department to track high-value outflows and ensure that such amounts were brought to tax or reconciled against the taxpayer's return. An authorised dealer (a bank or institution permitted by RBI to deal in foreign exchange) is responsible for collecting TCS at the time of remittance or release of funds.
The Finance Act 2023 significantly restructured TCS rates under 206C(1G) with effect from 1 October 2023. For remittances under the LRS for purposes other than education and medical treatment, the TCS rate was raised from 5% to 20% (without any threshold limit, though a Rs 7 lakh threshold remained for education and medical-funded remittances). Remittances for education financed by an educational loan from a specified financial institution carry TCS at 0.5%. Education remittances funded from own sources and medical treatment remittances carry TCS at 5% up to Rs 7 lakh, and at 5% beyond that.
For sale of overseas tour programme packages, the rate was enhanced to 20% (up from 5%), applicable from the first rupee with no threshold. This made booking international holidays through Indian tour operators more tax-intensive from a TCS perspective, though the collected amount is fully creditable against the buyer's tax liability.
TCS is not an additional cost for taxpayers who file returns, as the entire amount collected is available as credit in Form 26AS and the Annual Information Statement. However, it creates an interest-free advance to the government and introduces a cash-flow burden, particularly for large remittances.
For NRIs remitting funds out of NRO accounts for purposes covered under LRS or for investments abroad, the TCS provisions must be carefully evaluated against DTAA provisions and the residential status of the remitter.
SEBI had raised concerns about the potential impact of the 20% TCS rate on Indian investors accessing foreign mutual funds and international brokerage accounts, given the liquidity pressure on high-frequency investors.