Union Budget 2023 has brought forth significant changes to the tax collection at source (TCS) for foreign remittances under the liberalised remittance scheme (LRS).
While the TCS rate for most purposes has been increased from 5 per cent to 20 per cent, the budget has exempted education expenses from this higher rate. However, it is crucial for parents sending their children overseas to study to understand how TCS is applied to different types of expenses.
REMITTANCE THROUGH EDUCATION LOAN FOR FOREIGN EDUCATION
Under the existing LRS, remittances made for foreign education through an education loan paid abroad attracts a TCS of 0.5 per cent for the amount transferred beyond Rs 7 lakh. This provision remains unchanged in the Budget.
Suneel Dasari, founder and CEO of EZTax.in, explains, “If the source of funding is not an education loan, then money remitted overseas for the purpose of education attracts TCS at five per cent if the amount exceeds Rs 7 lakh.”
TCS ON FUNDING OTHER EXPENSES RELATED TO FOREIGN EDUCATION
Previously, remittances made for international education (expenses not funded by an education loan) exceeding Rs 7 lakh attracted a TCS of five per cent. However, Budget 2023 has removed the Rs 7 lakh threshold for all purposes, except education and medical treatment. This means that any remittances made for expenses other than education and medical purposes will now attract a higher TCS rate of 20 per cent.
CATEGORISING EXPENSES FOR TAXATION
To understand which expenses fall under the 20 per cent TCS rate and which qualify as educational expenses, Dasari provides insights.
He states, “Any expense or payment made overseas under LRS, excluding education and medical treatment, are subject to a 20 per cent tax."
Here are some examples:
Expenses Subject To 20 Per Cent TCS: This category includes tours and travel expenses, remittances for the maintenance of a foreign resident, and investments in shares/mutual funds outside India.
Educational Expenses Qualifying For Lower TCS Rate: Expenses considered as educational expenses and attracting a lower TCS rate include tuition fees, dormitory fees, lab fees, exam fees, books, and stationery. Additionally, living expenses, such as food and lodging can be claimed as educational expenses if a connection between these expenses and education can be established.
TAX TREATMENT FOR STUDENT ACCOMMODATION
The tax treatment of student accommodation depends on whether the student resides in university housing or third-party-provided housing.
University Housing: If the student stays in the accommodation provided by the university, it will be considered an educational expense.
Third-Party Housing: If the student resides in third-party-provided housing, the sender of funds must establish a connection between the expenses and education to claim them as educational expenses.
TAXATION OF REGULAR EXPENSES INCURRED BY STUDENTS
Regular expenses incurred by students, which are not directly related to education, are subject to the higher TCS rate of 20 per cent. This includes expenses for food, entertainment, clothing, and investments in stocks and/or mutual funds.
MINIMISING IMPACT OF TCS TAXES
While it may not be possible to entirely avoid TCS, the amount collected can be claimed as a tax credit when filing the tax return. To minimise the impact of TCS, individuals can plan to send Rs 7 lakh or less annually, as this threshold exempts remittances from TCS collection for educational purposes.
Understanding how TCS is applied to different expenses when sending your children overseas is essential. By being aware of the specific tax implications, parents can make informed decisions while managing their finances and ensuring compliance with tax regulations.
