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What is the impact of 20% TCS rule on all LRS investments from 1st July 2023?

Posted on 19 Apr 2023 • Updated on: 29 Jun 2023
Author: Sayan Sircar

Tags: Tax ; International Investing

6 mins read
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This article shows the impact of the new 20% TCS rule on all investments under the Liberalised Remittance Scheme from 1st July 2023 onwards.

What is the impact of 20% TCS rule on all LRS investments from 1st July 2023?

Originally published: 19-Apr-2023

Updated: 29-Jun-2023 - post LRS 20% postponed to 1st Oct 2023

📚 Topics covered:

What is the 20% TCS on LRS rule?
How does the 20% TCS rule work?
Adjusting TCS against advance tax payment
Impact of TCS if you do not have enough advance tax to adjust

What is the 20% TCS on LRS rule?

The Liberalised Remittance Scheme (LRS) allows you to remit up to $250,000 per financial year for foreign travel, education in foreign colleges and the purchase of stocks, ETFs and mutual funds in foreign stock exchanges. LRS allows resident Indian investors to invest directly in ETFs tracking the S&P500 or global market indices (like VWRA) or hyped stocks like Tesla and Apple.

In Budget 2023, a new rule has been introduced that all LRS investments for investing and foreign travel must undergo 20% TCS, which will set off against future tax liabilities.

LRS for educational expenses is exempt from 20% TCS.

Before Budget 2023, this TCS amount was 5% over ₹7 lakhs a year. As per the latest press release on 28-Jun-2023, TCS is applicable at 5% till ₹7 lakhs and 20% above ₹7 lakhs/year. The updated rules are here: How the government has provided relief to travellers and international investors by tweaking the LRS and TCS rules from 1st Oct 2023?.

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How does the 20% TCS rule work?

TCS = Tax Collected at Source

TCS is not TDS which is Tax Deducted at Source. In the case of TDS, a bank paying interest, for example, deducts a part of the interest payment as tax. You must pay the rest of the tax, as per the tax bracket, at the time of tax filing. You can read more here: Frequently asked questions on Tax Deducted at Source (TDS): the complete guide.

TCS is a tax collected in advance for the sole purpose of tracking an expenditure. It will be adjusted against advance tax or during the filing of tax returns. For example, suppose you invest ₹10 lakhs via LRS on 15 July. In that case, the remitting bank will deduct ₹2 lakhs as TCS, and you will be able to remit and invest only ₹8 lakhs.

Adjusting TCS against advance tax payment

Due date	Advance tax payable
15th June	15%
15th September	45%
15th December	75%
15th March	100%

All tax payers with more than ₹10,000/year tax liability must pay advance tax as per the schedule above. Since income tax from salary is deducted and paid by the employer, this advance tax must be paid on other sources of income like rent, interest from FD, dividends from stocks and mutual funds, capital gains on the sale of stocks, mutual funds or house etc.

You can adjust the TCS amount on LRS against this advance tax. However, if you do not have advance tax due, you must wait for tax filing time and then claim a refund.

Impact of TCS if you do not have enough advance tax to adjust

Effect of 20pct TCS on LRS investments

In the chart, we show the impact of ₹10 lakhs investment, growing at 5% a year, made on 15-Aug every year. In the first year, the TCS is ₹2 lakhs which is refunded the next August after the tax return is filed in July.

The following year ₹10.5 lakhs investment is made (5% increase) while the effective TCS (₹2.1lakhs for this year minus the ₹2 lakhs refund from last year) is only ₹10,000.

Year	Gross Investment	TCS (after refund)	Net investment
2023	10,00,000	2,00,000	8,00,000
2024	10,50,000	2,10,000	10,40,000
2025	11,02,500	2,20,500	10,92,000
2026	11,57,625	2,31,525	11,46,600
2027	12,15,506	2,43,101	12,03,930
2028	12,76,282	2,55,256	12,64,127
2029	13,40,096	2,68,019	13,27,333
2030	14,07,100	2,81,420	13,93,699
2031	14,77,455	2,95,491	14,63,384
2032	15,51,328	3,10,266	15,36,554
2033	16,28,895	3,25,779	16,13,381
2034	17,10,339	3,42,068	16,94,050
2035	17,95,856	3,59,171	17,78,753
2036	18,85,649	3,77,130	18,67,691
2037	19,79,932	3,95,986	19,61,075
2038	20,78,928	4,15,786	20,59,129
2039	21,82,875	4,36,575	21,62,085
2040	22,92,018	4,58,404	22,70,190
2041	24,06,619	4,81,324	23,83,699
2042	25,26,950	5,05,390	25,02,884

We have deliberately timed the investment so that the tax refund is obtained around the same time to offset the TDS. You invest once you receive the TCS refund.

This way, the impact of the 20% TCS is only for the first year. From the next year onwards, there is a minimal impact.

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