In the budget for 2023-24, noteworthy modifications were announced with respect to the Tax Collection at Source (TCS) system applicable to payments made under LRS and packages for overseas tour programs. Data indicates that the outward remittances spiked between June & September 2023 before the new TCS rules were implemented from October 2023.
The Liberalised Remittance Scheme or LRS is a regulatory framework introduced by the Reserve Bank of India (RBI) that allows resident individuals to remit a certain amount of money in a financial year for various capital account and current account transactions. That is, under the scheme, resident Indians are allowed to transfer funds abroad up to a specified limit, without the prior approval of RBI. The scheme was first introduced in 2004 and has undergone several revisions since then, based on the prevailing macro and micro economic conditions.
The Scheme was originally introduced with a limit of USD 25,000. As of the last revision in 2015, the prescribed limit is USD 2,50,000 per financial year (April to March). This is roughly equivalent to a tad more than two crore Indian rupees. While there is no limit on the frequency of remittances under the scheme, the resident individual will not be eligible to make any further remittances under the scheme if the remittance limit is reached.
In short, LRS has played a key role in making overseas expenses and investments simpler for resident Indians. The types of remittances made under the scheme include Deposits, Donations, Gifts, Investments in equity/debt, Maintenance of close relatives, Medical Treatment, Purchase of immovable property, Studies Abroad, and Travels, among others.
Total outward remittances under LRS have been increasing consistently, except during COVID-19 outbreak
According to RBI data sourced from Dataful, the total outward remittances under LRS have been increasing consistently. The growth is considerably higher in 2015-16 and 2016-17. In 2019-20, the total outward remittances under the scheme touched an all-time high of nearly 29,568 million USD. However, it dropped to less than half in 2020-21 due to the COVID-19 pandemic. Since then, the value has been improving. With one more quarter remaining in 2023-24, the total value is higher than that recorded before 2019-20 & in the pandemic years.
Remittances for travel accounted for than half of the total remittances under LRS
Remittances for travel alone accounted for more than 50% of the total remittances under LRS in 2022-23 and 2023-24. In terms of actual figures, the value has increased from 21 million USD in 2011-12 to 13,662 million USD in 2022-23. The remittances for this purpose have crossed the pre-pandemic levels.
Though education (studies abroad) and maintenance of close relatives accounted for more than 20% each of the total until 2021-22, their share has dropped significantly in 2022-23 and 2023-24. The remittances for studies abroad are yet to recover from the impact of the pandemic. In 2022-23, the value was below that recorded in the pandemic year, despite the increasing number of students emigrating from India.
Investment-related purposes, viz; purchase of immovable property, deposits, and investments in equity/debt together accounted for 31% of the remittances in 2011-12. However, their share has dropped to less than 10% since 2017-18. Investments in equity/debts rose 2.6-fold following the decline in the pandemic. Similarly, the remittances for purchasing immovable property have tripled since 2020-21 while that for deposits crossed the 1000 million USD mark in 2022-23.
Meanwhile, the remittances under LRS for medical treatment increased from less than 2 million USD in 2011-12 to more than 55 million USD in 2022-23, the highest in the 12 years. Total remittances for gifts were more than 3000 million USD in 2022-23.
Remittances for donations that peaked in 2019-20 dropped significantly post-pandemic and have been low since.
New TCS rates are applicable for transactions under LRS since October 2023
In the budget for 2023-24, noteworthy modifications were announced concerning the Tax Collection at Source (TCS) system applicable to payments made under LRS and packages for overseas tour programs. Taking into consideration the comments and suggestions received, the government made suitable changes to the initial proposal. Since 01 October 2023, the amended rules have been implemented.
- For the Purchase of overseas tour program packages, the TCS levied is 5% for an amount up to Rs. 7 lakhs per financial year per person, and 20% for higher transactions.
- Up to Rs. 7 lakhs per financial year per person, no TCS will be imposed for all other purposes. If the remittance amount exceeds the Rs. 7 lakhs threshold, the applicable TCS rates will vary depending on the purpose of the remittance.
- 0.5% for remittances made for educational purposes if financed through an education loan.
- 5% for remittances made for education (other than financed by loan) and medical treatment.
- 20% for remittances made for all other purposes
Credit card transactions have not been included in LRS yet
Further, the government had initially announced that payments using credit cards would be included under LRS. However, the inclusion has been postponed giving banks and card networks more time to implement required IT solutions, ensuring smoother integration. Hence, expenditure through international credit cards overseas is currently exempt from TCS until further notice.
The deducted TCS can be claimed/adjusted as an Income Tax Refund when filing IT Returns. As per the government’s version, increasing the TCS rates helps the government boost its revenue, counter tax evasion, increase transparency, and curb excessive spending, among others.
When the TCS rates are increased, there are potential impacts for individuals making transactions under LRS. One is that it can create additional compliance burdens individuals must navigate and adhere to the modified regulatory requirements. Liquidity is also affected. For instance, concerning investments, individuals need to deposit a higher amount than their actual investment to account for the deducted tax. They should also wait for months to file ITR and get this amount adjusted or to avail of the refund.
Considering these factors, the sudden spike in September 2023 for remittances towards the purchase of immovable property, investment in equity/debt, deposits, and gifts is no surprise. There has not been any significant change in remittances for travel.
Spike in outwards remittances for certain purposes which have increased TCS is seen prior to implementation of new rules
Outward remittances by resident Indians hit a seven-month high in September 2023. With respect to deposits and maintenance of close relatives, a spike in September 2023 is seen as compared to the remittances in the same month between 2018 and 2022. Like in 2023, in 2020, the proposal to collect TCS on remittance under the scheme was mentioned in the budget speech.
Deposits in September 2023 were close to those recorded in the same month in 2020. However, unlike in other years, the deposits in October and November 2023 dropped significantly. Similarly, in the case of maintenance of close relatives, the average remittances in September were about 280 million USD. However, in 2023, it crossed 500 million USD, before dropping to less than half in the following months.
Investment in equity and debts touched 208 million USD compared to an average of 70 million USD in September 2020, 2021, and 2022 and dropped to 40 million USD in November 2023. Likewise, in the case of gifts, the remittances which grew month-on-month by 10 to 50 million USD, shot up by 150 million USD in September 2023 and dropped in October and November, like the spike in 2020. Remittances to purchase property more than doubled in September 2023 as compared to September 2022.
The amendments proposed lower TCS for remittances under LRS towards medical treatment and education. While there has been a sudden increase (doubled) remittances towards medical treatment following the implementation of the new rules, there has not been any significant change in the remittances to study abroad.
The new rules imposing higher TCS have been implemented since October 2023. The patterns in outward remittances indicate a clear increase towards certain purposes just before the implementation of the new rules as individuals may have tried to avoid higher TCS.