The Ministry of Finance has recently provided much-needed clarification on the Collected At Source Tax (TCS) on foreign remittances, particularly concerning education-related expenses. This clarification is crucial for parents who are sending money abroad for their children’s education. It is essential to be aware of the new rules to avoid paying unnecessary TCS.
Under the Liberalized Remittance Scheme (LRS), parents can send up to Rs $250,000 during one financial year to their children studying abroad for various course-related expenses. However, if parents wish to send more money than the prescribed limit, they must obtain permission from the Reserve Bank of India.
When it comes to the Overseas Education Deposit, parents can send up to Rs 7 lakh annually without being subject to TCS for education-related expenses. But if the remittances for foreign education exceed this threshold and are supported by a loan from an approved financial institution, a 0.05% TCS will be levied. On the other hand, any remittance over Rs 7 lakh for educational purposes, not obtained through a loan, will attract a 5% TCS.
To understand the implications of these rules, let’s consider an example. If you remit Rs 9,00,000 abroad for educational purposes under LRS in one financial year and the money has not been obtained through an education loan, a 5% TCS will be charged on the amount above Rs 7 lakh. In this case, the TCS amount will be Rs 10,000. It is crucial to take note of these existing TCS rates for sending money through LRS for a child’s education because higher rates will come into effect on October 1, 2023.
However, it’s important to remember that these rules only apply to explicit education expenses. Other related expenses that don’t fall under the category of education expenses might be subject to different TCS rates.
To avoid any confusion or misinterpretation of the TCS rules, it is crucial to accurately classify your payments. The Ministry of Finance has provided a broad interpretation of the term “education,” which includes not only tuition fees but also other expenses such as commuting tickets between India and the foreign country, daily expenses necessary for study, and fees for correspondence courses abroad. When making payments, make sure to classify them correctly to attract the appropriate TCS rate.
When sending money for your child’s education abroad, you will need to submit the A2 form and the LRS return form to the bank. These forms specify the purpose of the remittance, such as tuition fees, accommodation costs, travel expenses, or incidental expenses. Additionally, you must provide the student’s name, student ID, and the name of the university.
For remittances made from a loan, additional documents are required, such as the Education Loan Sanction Letter, a statement on the LRS application confirming that the source is from the loan, and a bank statement showing the source of funds as an undrawn Education Loan from a financial institution.
It’s crucial to keep track of all your remittances under LRS to avoid any discrepancies. Authorized dealers may request details of previous remittances made by clients above Rs 7 lakh in the current financial year. Providing accurate information is essential, as false declarations may lead to appropriate actions being taken against the sender.
Remember that the Rs 7 lakh threshold for LRS is a combined limit applicable to TCS on all LRS transactions, irrespective of the purpose of the remittance. Whether you are paying for education, medical treatment, or general expenses, all these expenses contribute to the same limit.
In conclusion, it is vital for parents to understand the new rules regarding TCS on foreign remittances for education-related expenses. By being aware of these rules and following the correct procedures, parents can ensure that they are not subjected to unnecessary TCS charges. It’s important to accurately classify your expenses and provide the required documents to avoid any confusion or penalties.
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How much money can parents send abroad with LRS in a year?The Liberalized Remittance Scheme (LRS) allows parents to send money to their children studying abroad to meet various course-related expenses. Under LRS, parents can send money up to Rs $250,000 during one financial year. In case parents wish to remit more money than the prescribed limit, they need to get permission from the Reserve Bank of India.
How will TCS apply for the Overseas Education Deposit?
Under LRS, parents can send up to Rs 7 lakh annually without being subject to TCS for education-related expenses. If remittances for foreign education exceed the threshold of Rs 7 lakh and are financed by a loan from any approved financial institution, a 0.05% TCS will be levied. Any remittance over Rs 7 lakh for educational purposes, not obtained through a loan, will attract a 5% TCS.
Let’s say you remitted Rs 9,00,000 abroad for educational purposes under LRS in one financial year. A 5% TCS will be charged on amounts above Rs 7 lakh if the money has not been obtained through an education loan. So, the TCS amount in this case will be {(9,00,000-7,00,000)*5/100}=Rs 10,000.
These are TCS’s existing rates for sending money through LRS for a child’s education. The higher rates of the TCS will take effect on October 1, 2023. However, if you accept that the expenses are for education, there will be no change after this deadline. However, the same cannot be said of other related expenses that may not explicitly fall under the category of education expenses.
What education expenses will qualify for a lower TCS rate?
Removing confusion among taxpayers, the Ministry of Finance has tracked expenditures that will be considered education-related expenses. In a communication dated June 30, 2023, the ministry specified that remittances for education include:
i) Remittance for the purchase of tickets of the person pursuing studies abroad for commuting between India and the destination abroad
ii) Tuition fees and other fees payable to the educational institution
iii) Other daily expenses required to undertake such a study such as food, lodging, local transportation, health services, etc.
As you can see, the incidental expenses of studying abroad will also be treated as remittances for educational purposes and will attract a lower rate of TCS.
Documents needed to send money for your child’s education abroad
To remit money with LRS, the parent or issuer must submit the A2 form to the bank along with the LRS return form. “In this statement, they must specify the purpose of the remittance, such as tuition fees, accommodation costs, travel expenses, or incidental expenses. They must also provide the student’s name, student ID, and the name of the university,” said Neeraj Agarwala, Partner, Nangia Andersen India.
In case the remittance is made from a loan and a reduced TCS of 0.5% applies, the sender is also required to provide the following documents, Agarwala explained:
a) Education Loan Sanction Letter with the name of the student and the parent who is the co-borrower.
b) Statement on LRS application by customer that source is from loan.
c) Bank statement showing source of funds as an undrawn Education Loan from a financial institution.
New TCS rule: what to keep in mind when sending money abroad for a child’s education
“The central government has given a broad interpretation of the term ‘education’ when it comes to remittances from abroad. This includes not only tuition fees but also expenses such as commuting tickets between India and the foreign country , daily expenses necessary for study and fees for correspondence courses abroad (where the student is not traveling abroad). When making payments, please ensure that you classify them correctly to avoid any confusion or misinterpretation of the TCS rules,” he said Ankit Jain, Partner, Ved Jain & Associates.
It is important to keep track of the LRS codes and mention the correct one when paying out. For remittance purposes, the Reserve Bank of India has classified various forms of transactions into specific codes. “S0305 and S1107 are of particular importance to education,” Jain said. Explaining it further, he mentioned, “S0305 covers education-related services such as tuition, food, lodging, local transportation and health services procured by resident students while abroad. On the other hand, S1107 pertains to transactions for education in which the student does not “do not travel abroad, such as fees for correspondence courses. Therefore, you must ensure that your transactions are categorized under the correct LRS code while making your remittance.”
Under the LRS, no TCS will be levied in the amount of up to Rs 7 lakh per financial year per individual irrespective of the purpose. For remittances above Rs 7 lakh, the TCS rate can go up to 20%, depending on the nature of the transactions. There are exemptions for education-related payments and medical expenses. Therefore, it is important to mention the correct code when depositing money to get TCS at a reduced rate.
Track your total remittance under LRS, avoid discrepancies
Also, please note that parents must give their Authorized Reseller a commitment to share details of previous remittances they have made for any purpose mentioned in LRS in the current financial year. Authorized dealers will accept a statement from clients to deduct TCS based on previous remittances above Rs 7 lakh made by clients with other authorized dealers, said Sudarshan Motwani, founder and CEO, BookMyForex.com.
“In order to avoid discrepancies, clients should provide accurate information on all previous transactions made under LRS. False declaration/escrow information may lead to appropriate action against the sender. Correct declaration may also affect the TCS rate, which further impacts the overall cost of sending money overseas,” Motwani said.
“Based on the Circular dated 30 June 2023, banks can now request an additional declaration from the sender to confirm that the amount remitted does not exceed the specified limit of Rs 7,00,000. This is to confirm the total remittance made by the sender in the financial year. For any false information in the pledge, appropriate actions can be taken against the sender,” Agarwala said. The burden of providing the right information rests with the sender or parent.
Track the total remittance amount to calculate any TCS obligations. The Rs 7 lakh threshold for LRS is a combined threshold, applicable to TCS on all LRS transactions, irrespective of the purpose of the remittance. Whether you are paying for education, medical treatment or other general purposes, all these expenses contribute to the same limit of Rs 7 lakh.
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