If you are investing in overseas securities, directly or through a mutual fund, be prepared to set aside 20% of your investments as tax collected at source.
Not just investments, if you are spending on an overseas holiday through a tourist package, you will pay 20% more to the tour operator.
Budget 2023 has imposed a new rule. Upfront tax of 20% will be collected at source for any investment or spending under the liberalized remittance scheme. This is exempt only for education and medical treatment.
To be clear, the scope of TCS on remittances hasn't seen any change. Such transactions always attracted tax collected at source provision. It's the rate that has been revised from 5% to 20%.
Indians investing in overseas securities so far were paying only 5% as TCS on amounts in excess of Rs 7 lakh.
So, if the investment is worth Rs 1 lakh, Rs 20,000 will be locked up with the government as TCS. This can be reclaimed or accounted for at the time of filing the tax return.
This will hit all platforms offering international stocks and international crypto exchanges, Nithin Kamath of Zerodha tweeted. Zerodha doesn't offer any of these products, he clarified.
TCS can be claimed after filing income tax returns at the end of the year, but it's unlikely that many will be okay with having 20% of capital blocked until then.
February 1, 2023
This will adversely affect all platforms offering international stocks and international crypto exchanges. 2/3In recent years, startups such as airpay, Vested and INDmoney have become popular owing to their simple interface which allows Indian users to easily invest in foreign securities or remit funds abroad.
On Jan. 23, the Reserve Bank of India announced restrictions on SBM Bank India, stopping it from using the LRS route to provide services clients of startups mentioned above. The regulator did ease the restrictions a week later, allowing physical merchant transactions and ATM withdrawals under the LRS scheme.
"When it comes to investing abroad through the LRS, which some investors do to diversify their portfolios, they'll likely have to treat this as a necessary requirement," said Arvind Rao, founder, Arvind Rao & Associates. "But they should bear in mind that there is an opportunity cost because of the significant tax collected at source, which will not earn a return."
If you are discouraged from investing abroad, you are also not encouraged to spend either.
The new 20% TCS rule applies to tour packages as well. Earlier, the TCS was 5% without any threshold. A senior official at a company offering tour package said this will mean a big hit.
A holiday package worth Rs 1 lakh today attracts 5% goods and services tax and a 5% TCS, making it Rs 1.1 lakh selling price. In the new structure, a package will cost Rs 1 lakh, loaded with Rs 5,000 GST and Rs 20,000 TCS. Although TCS is refundable, the official said.
"While it may be possible for some individuals to adjust for the TCS in the form of reduced advance tax payments, for a salaried person, who may not have a significant amount on which to pay advance tax, this is not feasible," Rao said.
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