Sending money abroad for education? Watch out for these errors to avoid 20% TCS But parents must be careful about the fine details of TCS while remitting money for overseas education. In case of any carelessness, they would end up paying a hefty amount of TCS on their spending. Here the things to keep in mind while sending money abroad for education
After a lot of chaos and confusion, the Ministry of Finance has issued much-needed clarification on tax collected at source (TCS) on foreign remittances and how it will apply. If you send money to your child studying abroad or are planning to send your child outside for higher studies you must be aware of these new rules. The higher rate of TCS will not apply to education expenses incurred abroad. But parents must be careful about the fine details of TCS while remitting money for overseas education. In case of any carelessness, they would end up paying a hefty amount of TCS on their spending. ET Online explains.How much money can parents send overseas under LRS in a year?
The Liberalised Remittance Scheme (LRS) allows parents to send money to their kids studying overseas to meet various expenses related to the course. Under LRS, the parents can send money of up to Rs $250,000 during a financial year. In case, parents want to remit more money than the prescribed limit, they need to take permission from the Reserve Bank of India.
How will TCS apply for remitting money for education abroad?
Under LRS, parents can send up to Rs 7 lakh per year without being subject to TCS for education-related expenses. If remittances for foreign education cross the threshold of Rs 7 lakh and are financed by a loan from any approved financial institution, a TCS of 0.05 per cent will be levied. Any remittance beyond Rs 7 lakh for education purposes, not obtained through a loan, will attract a TCS of 5 per cent.
Let’s say you have remitted Rs 9,00,000 abroad for education purposes under LRS in a financial year. A TCS of 5 per cent will be charged on amounts exceeding Rs 7 lakhs if the money has not been obtained through an education loan. So, the amount of TCS, in this case, will be {(9,00,000-7,00,000)*5/100}=Rs 10,000.
These are the existing rates of TCS for sending money through LRS for a child's education. The higher rates of TCS will come into effect from October 1, 2023. However, if the expenses are accepted to be for the purpose of education, then there would not be any change after this deadline. However, the same cannot be said about other related expenses which may not explicitly fall under the category of education expense.
Which education expenses will qualify for a lower TCS rate?
Clearing confusion among taxpayers, the Ministry of Finance charted out expenses which will be considered as education-related expenses. In a notification on June 30, 2023, the ministry pointed out that the remittances for education include:
i) Remittance for purchase of tickets of the person undertaking study overseas for commuting between India and the overseas destination
ii) The tuition and other fees to be paid to the educational institute
iii) Other day-to-day expenses required for undertaking such study like food, accommodation, local transport, health services, etc.
As you can see, the ancillary expenses for studying abroad will also be treated as remittances for education purposes and attract a lower rate of TCS.
Documents you need to send money for your child's overseas education
To remit money under LRS, the parent or remitter needs to submit Form A2 cum LRS declaration form to the bank. "In this declaration, they need to specify the purpose of remittance i.e., tuition fees, accommodation fees, travel expenses, or incidental expenses. They also need to provide the student name, student ID, and university name," said Neeraj Agarwala, Partner, Nangia Andersen India.
In case the remittance is made from a loan and a reduced TCS of 0.5 per cent applies, the remitter is also required to provide the following documents, Agarwala explained:
a) Education loan sanction letter with student name and parent who is the co-borrower.
b) Declaration on the LRS application from the client that the source is from the loan.
c) Bank statement showing the source of funds as unutilized disbursed Education loan by a financial institute.
New TCS rule: What to keep in mind while sending money abroad for a child's education
"The central government has provided a broad interpretation of the term 'education' when it comes to foreign remittance. This includes not just the tuition fees but also expenses such as commuting tickets between India and the foreign country, daily expenses required for studying, and fees for correspondence courses abroad (where the student doesn't travel overseas). As you make payments, ensure to categorize them correctly to avoid any confusion or misinterpretation of TCS rules," said Ankit Jain, Partner, Ved Jain & Associates.
It is important to keep track of LRS codes and mention the correct one while remitting money. For the purpose of remittance, the Reserve Bank of India has classified various forms of transactions under specific codes. "The codes S0305 and S1107 are of particular importance for education," said Jain. Explaining it further, he mentioned, "S0305 covers education-related services like tuition, food, accommodation, local transport, and health services procured by resident students while staying overseas. On the other hand, S1107 pertains to transactions for education where the student doesn't travel abroad, like fees for correspondence courses. Therefore, one must ensure that the transactions are classified under the correct LRS code while making the remittance."
Under the LRS, no TCS will be collected for an amount up to Rs 7 lakh per financial year per individual, regardless of the purpose. For remittances above Rs 7 lakh, the TCS rate can go up to as high as 20 per cent, depending on the nature of the transactions. There are exemptions available for education-related payments and medical expenses. So, it is important to mention the right code while remitting money to get TCS at a reduced rate.
Keep track of your total remittance under LRS, avoid discrepancies
Further, keep in mind that parents have to give their authorised dealer an undertaking to share details about earlier remittances they've made under any purpose mentioned under LRS in the current financial year. The authorised dealers will accept a declaration from customers to deduct TCS based on previous remittances exceeding Rs 7 lakh carried out by the customers with other authorised dealers, mentioned Sudarshan Motwani, Founder & CEO, BookMyForex.com.
"In order to avoid discrepancies, customers should provide accurate information about all previous transactions made under LRS. False information on the declaration/undertaking may lead to appropriate action against the remitter. The right declaration can also affect the TCS rate, which further affects the overall cost of sending money abroad," said Motwani.
"Based on the circular dated June 30, 2023, the banks may now ask for an additional declaration from the remitter 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 remitter in the financial year. For any false information in the undertaking, appropriate action may be taken against the remitter," said Agarwala. The onus of providing the right information lies with the remitter or parent.
Keep track of the total remittance amount to calculate any potential TCS obligations. The Rs 7 lakh threshold for LRS is a combined threshold, applicable to TCS on all LRS transactions, regardless of the purpose of the remittance. Whether you're paying for education, medical treatment, or for other general purposes, all of these expenses contribute to the same Rs 7 lakh limit.
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This story originally appeared on: India Times - Author:Faqs of Insurances
