The Union Budget proposed by Finance Minister Nirmala Sitharaman in February 2023 announced some significant modifications to personal finance. One of them is the introduction to the New Tax Regime. Another significant development was the TCS (Tax Collected at Source) for foreign transactions.
If you are an Indian parent who sends money to your child who is studying abroad, this read is a must for you!
What is TCS in Foreign Remittance Transactions?
TCS is a tax that is collected by the seller or service provider from the buyer or recipient at the time of payment. The seller or service provider then deposits the collected tax to the government on behalf of the buyer or recipient. TCS is applicable on the sale of scrap, sale of minerals, sale of forest produce, etc.
2023 Union Budget update in TCS
In the 2023-23 Budget address, Finance Minister Nirmala Sitharaman announced that the TCS rate for foreign remittances under the LRS would increase from 5% to 20% of the transaction amount. The tax increase on foreign remittance falls under the Liberalised Remittance Scheme (LRS) and will be effective from July 01, 2023.
The increased TCS rate will apply to overseas tour packages and other remittances except for education and medical purposes. The purpose behind this increase was to target wealthy individuals who tend to avoid taxes.
How will 20% TCS affect Opening Blocked Accounts?
When the new TCS scheme was introduced, it caused a lot of chaos. While blocked accounts are necessary for studying in Germany, it would be hard to define the nature of the expense. For example, if in case somebody wishes to pay a tuition fee – it directly is an educational expense and would only be taxed at 5%. Moreover, if that transaction is funded by an educational loan then it would only be taxed at 0.5%. But recently it has come to light that it’s not as simple as that and not all blocked accounts are the same.
What is a Blocked Account?
A blocked account is an account in which you block €11,208 as a financial assurance to the German government. This money would later be paid back to you in installments of €908 per month and you will use this money to run your daily expenses in Germany. It should be noted that this money is not for anybody else but rather for yourself.
You can check more on the blocked account on Expatrio.
Not too long ago, it became clear that the blocked account expense will be different for different applications. Let me explain. In Germany generally, 3 kinds of blocked accounts exist for 3 different applications.
- Jobseekers (People wanting to come to Germany on a Jobseeker VISA)
- Dependents (Families of foreign students and workers coming to Germany)
Now, the blocked accounts opened to support the educational Journey of a student will only be taxed at 5%. At the same time, the blocked accounts opened by Jobseekers will be taxed at 20%, and similarly, blocked accounts opened for dependents moving to Germany will also be taxed at 20%.
Generally, the German job seeker visa has a maximum stay of 6 months hence, the blocked account is opened for around 6 months only. Naturally, the amount is halved and the applicant only has to show 908*6 = 5602 EUR.
For the dependent visa, it is a bit different depending on the age of the applicant. To bring over an Adult person, you will need to block €11,208 and for every child that comes alongside – it would be €5,604.
How to Get Tax Benefits From the New TCS?
There are some exemptions and lower rates of TCS available for certain transactions under the LRS. These are:
- Foreign remittances up to Rs 7 lakh for covering medical expenses are exempt from TCS.
- Foreign remittances up to Rs 7 lakh for covering educational expenses are exempt from TCS if funded by an education loan. For transactions above this threshold, a lower TCS rate of 0.5% will apply if funded by an education loan. If funded by any other source, a TCS rate of 5% will apply for transactions above Rs 7 lakh.
- Foreign remittances made by NRIs from their NRO accounts to their NRE accounts are exempt from TCS as per Section 206C (1G) of the Income Tax Act.
To avail of these benefits, you need to submit proof of purpose and source of funds to the bank or service provider who facilitates the transaction. You also need to provide your PAN card details, otherwise the TCS rate will increase further.
What are Some Other Expenses That May Attract Higher TCS?
Apart from sending money for educational purposes, you may also have to send money to your child who is studying abroad for other expenses such as:
- Living expenses such as rent, food, travel, etc.
- Discretionary expenses such as shopping, entertainment, hobbies, etc.
- Emergency expenses such as medical bills, legal fees, etc.
These expenses may not fall under the category of education expense with regards to taxation and hence may attract higher TCS at 20% if it is not established that the money is sent for educational use. Naturally, this would be a challenge for your CA and you might attract fines and penalties if you’re not meticulous will tax filings.
Want to know if you can study in Germany? Take a Free Profile Evaluation for Germany
The Best Way to Send Money to Your Blocked Account from India!
Sending money to your blocked account from India can be a challenging task, especially with the introduction of the 20% TCS tax on foreign remittances. However, there is a reliable and convenient method that can help you overcome this hurdle: Wise.
Wise (formerly known as TransferWise) is an international money transfer service that offers competitive exchange rates and low fees. It provides a transparent and efficient solution for transferring funds from your Indian bank account to your blocked account in Germany.
To send money through Wise, follow these steps:
- Visit the Wise website using this link to get started.
- Sign up for a Wise account by providing your name, email address, and contact information.
- Once your account is set up, enter the amount you wish to send from your Indian bank account to your blocked account in Germany.
- Wise will display the exchange rate and fee associated with the transfer, ensuring transparency and allowing you to save money compared to traditional banking methods.
- Review the details and proceed with the transfer, choosing your preferred payment method such as bank transfer or debit/credit card.
- Provide the recipient details, including your blocked account information in Germany. Double-check that you have the correct IBAN (International Bank Account Number) and other relevant details to avoid delays.
With Wise, you can rely on its secure platform to handle the currency conversion and facilitate the transfer within a few business days. You can track the progress of your transfer through the Wise platform or mobile app.
The increased TCS rate on foreign remittances under the LRS will affect your plans to send money to your child who is studying abroad in 2023. However, you can still get some tax benefits by availing the exemptions and lower rates of TCS available for certain transactions. You also need to keep track of your foreign remittances and claim credit for the TCS paid against your income tax liability.
To check the latest update take a look at the video below.
Q: What is the difference between TCS and TDS?
A: TCS and TDS are both types of tax deducted at source. The difference is that TCS is collected by the seller or service provider from the buyer or recipient, while TDS is deducted by the payer from the payee.
Q: How can I check the status of my TCS refund?
A: If you have paid more TCS than your income tax liability for the year, you can claim a refund of the excess amount. To check the status of your TCS refund, you need to login to the e-filing portal of the Income Tax Department and go to ‘My Account’ > ‘View e-Filed Returns/Forms’ > ‘Income Tax Returns’ > ‘Acknowledgement Number’. You can then see the status of your refund under the ‘Refund/Demand Status’ column.
Q: How can I send money to my child who is studying abroad without paying TCS?
A: There is no way to completely avoid paying TCS on foreign remittances under the LRS. However, you can reduce the amount of TCS by availing of the exemptions and lower rates of TCS available for certain transactions. You can also use other methods of sending money abroad such as wire transfers, online platforms, prepaid cards, etc. However, these methods may have their own fees, charges, and limitations that you need to consider before choosing them.