For every individual, an urgency may occur to transfer money abroad at some point in their life for some purpose. Through swift transfer, one can remit money to overseas countries quickly. These outward remittances should be done on a secure banking network, limiting the chances of fraud and financial loss to the sender and recipient.
The Indian government imposed a tax on remittance by resident individuals in India from 1st October 2020. Though this new rule directly does not affect NRIs, it will be significant if they remit money from India or send funds from other parties. And those who receive money for investment purposes will have to pay tax at 5% if the remittances are above INR 700,000. The tax is collected by the remitting bank and deposited with the government. Though the same was to take effect from April 2020, it was delayed because of the pandemic to October 2020.
Before going directly into the tax details for remittance, let’s have a brief and detailed look at the RBIs law governing these rules:
What is LRS?
The RBI has set specific guidelines and protocols to protect individuals who make an outward foreign remittance. These guidelines come under the Liberalized Remittance Scheme (LRS). Under the Liberalized Remittance (LRS) Scheme, all resident individuals, including students, and minors can freely remit up to $250000 per financial year (April – March). We can use up to the limit of $ 250000 in a single forex transaction or multiple forex transactions combined in a financial year.
Why was LRS Introduced?
Before introducing LRS, it was difficult for Indians to send money abroad, especially to those parents whose children were studying abroad. RBI entrusted the responsibility to research and make recommendations to the Tarapore committee, and based on the committee recommendations, LRS came into being. The very purpose behind the introduction of LRS was to streamline Outward remittance.
Significant Purposes of exchanges using LRS
The primary purposes for sending money abroad include travel, gift, repatriation, employment, emigration, maintenance of close relatives abroad, Medical treatment, and study abroad. A Pan card is mandatory for sending money abroad. If the remitter is a minor and does not have
pan card, the father’s or mother’s pan card will suffice the purpose.
Key Points to Consider In International Money Transfer
● Exchange Rates: Take a record of the exchange rates while opting for the services. Foreign exchange rates continually vary; hence it is often prudent to double-check the rates, especially in higher amounts.
● Service Provider: Choose the safest, secured, and advanced assistance providers for International money transfers.
● Transaction Charges: Always try to rely on accredited service providers with standard transfer fees.
● Time for Overseas Transfer: SWIFT Transfer can take up to 48 working hours for the fund to be credited into the beneficiary account abroad.
Now let’s hover more on tax applicability on Outward remittances.
Tax applicability on Outward remittances
As mentioned earlier, from 1st October 2020 onwards, banks and authorized dealers must collect TCS @ 5% for outward remittances above seven lakhs in a financial year. It is necessary to see that this tax introduced is only applicable to amounts exceeding seven lakhs. The government will reduce the tax to 0.5% if the source of remittance is an education loan. TCS can be claimed by filing an IT Return.
Let’s look into some of the Outward remittances affected by this new tax applicability.
1. FOREIGN TOUR PACKAGE
Payments for foreign tour packages are subject to 5% tax without any exemption threshold, including business tours, family tours, and religious tours covering travel, lodging, and boarding expenses.
For education-related foreign remittances supported by loans, the tax will be only 0.5% for any amount above INR 700,000, examining the significant number of Indian students who take loans to pursue education abroad.
If a person remits funds abroad under LRS or buys a foreign tour package without a PAN Card or Aadhar Card, the tax rate will be 10% instead of 5%.
PAN Card is mandatory for all taxpayers, and Aadhar is the unique national identity card linked to all bank transactions.
2. Investors hit
Though The new tax rules do not directly impact NRIs, Indian residents who invest in foreign stocks, bonds, or properties will find their upfront costs and expenses increased as the tax increases their prices.
For example, anyone who transfers $9,500 or above for purchasing stocks or business will have to pay the tax the banks will collect.
Individuals can start, maintain and hold foreign currency accounts with banks outside India for proceeding out transactions allowed under the scheme. Still, they will have to meet 5% remittance tax if the investments are beyond the threshold limit.
Here also, the investors will have to carry the extra cost on account of the tax. Investors remitting less than INR 700,000 per year will see no impact of these rules.
3. Netting Tax Evaders
The new law, to widen the tax net and to follow such remittances as the authorities found that individuals have frequently been using the LRS route to remit money abroad by overrunning the tax. While remitting money overseas, the lenders must collect 5% tax for depositing with the government.
The LRS remittance scheme implements only for Indian residents.
NRIs can send up to $1m outside India per financial year from surpluses held in an NRO account.
Remittance exceeding that sum will require special permission from the RBI.
About any queries or doubts related to the tax laws under RBIs LRS Scheme, Contact us at UNIMONI INDIA, get into our website and arrange a free demo call with us. Our professional team will guide you through transferring your money for any need efficiently, abiding by all the tax rules and guidelines under the RBIs LRS Scheme.
