How to avoid TCS: If you plan to send your children abroad for higher education, you do not need to worry about the 20% tax collected at source (TCS) rule, which will apply to other foreign remittances beginning on July 1, 2023. The finance ministry has clarified that the higher rate will not apply to education and medical expenses incurred abroad. However, there are some minor print provisions that parents must comprehend.
How to avoid TCS: How much money can parents send abroad annually?
The Liberalised Remittance Scheme (LRS) permits parents to transmit funds to their children studying abroad in order to cover various course-related expenses. The LRS imposes a $250,000 limit on the amount of money that parents can transmit abroad during the fiscal year (1 April to 31 March). If the amount to be transferred exceeds this limit, RBI’s approval is required.
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How does TCS apply to international education?
Under the Liberalised Remittance Scheme (LRS), parents may send money abroad for their child’s education. There is typically no exemption limit for LRS payments. However, there is an exception for payments related to education. You can transfer up to Rs 7 lakh per year without paying TCS. If the quantity is greater than Rs 7 lakh, the TCS rate is reduced to 5%. If the funds are transferred by way of an education loan, the TCS rate is reduced to 0.5%.
Nota bene: TCS at the rates of 0.5% or 5% would still apply even if the funds (in excess of Rs 7 lakh) are transferred prior to 1 July 2023.
Example 1: Parents who remit Rs 30,000 per month for their daughter’s overseas education will not be subject to the TCS rule because the total amount remitted is less than the annual threshold of Rs 7 lakh. However, if the threshold limit is exceeded, TCS will still be assessed at 5% and not 20%.
Example two: You wish to transfer Rs 1 lakh per month for your child’s overseas education. The total amount remitted in a year is Rs 12 lakh, which is greater than the annual threshold of Rs 7 lakh. While Rs 7 lakh is not subject to TCS, the remaining Rs 5 lakh is subject to TCS at 5%.
Which educational costs are eligible for a reduced TCS rate?
These fees include tuition, housing, lab, exam, textbooks, and stationery. In addition, living expenses, such as food and accommodation, can be claimed as educational expenses if a connection can be established between these costs and education.
“The scope of the above benefit/exemption is sufficiently broad to encompass remittances made by an individual for his/her own education or by others, such as parents paying for their children’s education, etc. Any fees paid to educational institutions for tuition, dormitory housing, and other living expenses may also qualify for the benefit. Also, the aforementioned should be available for all possible modalities of remittance, such as wire transfers, card payments, travellers’ cheques, foreign currency purchases, etc., according to S. Vasudevan, Executive Partner at Lakshmikumaran & Sridharan Attorneys.
How to avoid TCS: What happens if the pupil does not live on campus?
If the student stays in university-provided housing, it is automatically considered an educational expense. However, if the student resides in housing provided by a third party, the sender of funds must establish a connection between the expenses and education in order to claim them as educational expenses.
Are additional living expenses covered by the 5% TCS as well?
The rates of TCS applicable to remittances for education and medical treatment will apply to remittances for travel and incidental expenses related to education and medical treatment, the finance ministry clarified.
“However, challenges on the ground will have to be assured in order to monitor the ultimate use of such funds. It should not be possible for parents/families to conceal other remittance purposes under the guise of incidental education expenses, thereby avoiding a 20% higher TCS rate. In this regard, a clarification in depth is required. Other incidental expenses unrelated to education will be subject to a 20% TCS, according to Keshav Singhania, chief of Private Client Services at Singhania & Co.
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What proof of documentation is necessary to fund education and living costs?
Banks are responsible for collecting TCS, and it is their responsibility to determine what constitutes “education.”
“When transmitting funds internationally, the correct remittance code must be used to demonstrate that the funds are being sent for educational purposes. The sender must provide the bank with a Form A2 cum LRS declaration. In this declaration, the sender specifies the payment’s purpose, such as tuition, lodging/travel expenses, etc. On this form, the remitter may also include the student’s name, student ID number, foreign university name, etc., to substantiate educational purposes, according to Akhil Chandna, Partner, Tax, Grant Thornton Bharat.
Ankit Jain, Partner at Ved Jain & Associates, advised that the remittance should be accompanied by the following documentation:
- Admission/offer letter to college that includes the student’s name.
- Specifics of the schedule
- The fee invoice must include the college’s bank account information for remittance.
- Prospectus of the programme.
- Evidence of the relationship between the sender and the recipient.
- While Form 15CA/CB is not always required, some institutions may request it for such transfers.
- If you elect for an education loan, you must submit the following documents to qualify for a 0.5% TCS reduction:
- Education loan approval letter with the student’s name and co-borrower parent’s name
- Declaration by the client on the LRS application that the source is the loan
A financial institution’s bank statement indicating the source of funds as an unused disbursed education loan
“Banks may require evidence of the final destination of the funds. For instance, banks may require documentary evidence of admission from educational institutions in addition to an estimation of fees and other expenses. According to S. Vasudevan, banks may also require copies of invoices, receipts, rental agreements, etc. to verify the final use of the funds.
How can one send over Rs 7 lakh to finance living expenses for children studying abroad without incurring a 20% TCS?
Since each resident individual has their own LRS limits, parents/families may distribute the remittance to be sent to a student abroad requiring funds in excess of Rs 7 lakh by spreading the remittance across various family members in a manner that does not exceed each individual’s threshold limit. According to Keshav Singhania, Head of Private Client Services at Singhania & Co., there will be no adverse tax ramifications, as both the donor and the donee will be classified as relatives under the Income Tax Act’s definition.
In other words, parents should maximise the exemption limit of Rs 7 lakh. Each parent can send up to Rs 7 lakh without incurring TCS, allowing you to send up to Rs 14 lakh in total. Additionally, grandparents can assist with remittances.
“For instance, if Aryan’s hostel fees amount to Rs. 13 lakh, his parents can split the amount in half and send it from two accounts, one from their account and the other from his sibling’s account, so that no TCS is levied on the amount transferred,” said Abhishek Nangia, Senior Associate at SKV Law Offices.
How can parents further reduce this TCS burden?
Since educational expenses are not subject to TCS as long as they are less than Rs 7 lakh, students do not need to fret about increased tax obligations. Adhil Shetty, CEO of BankBazaar, stated, “However, it is prudent to keep transaction details and receipts whenever any fees or money is spent on education-related expenses.”
The following is Jain’s advice for parents:
Utilise the Rs 7 lakh exemption limit per parent.
Involve grandparents if feasible for additional remittances.
Consider financing your education through a student loan to take advantage of the reduced TCS rate.
Keep all required documentation on hand and ensure that all education-related remittances are appropriately classified in order to qualify for lower TCS rates.
How to avoid TCS: What if I gave my infant a foreign currency card to cover expenses?
Nangia clarified that a TCS of 20% will be imposed if a student uses a forex card to pay for expenses overseas. The TCS threshold exemptions applicable to ICCs and IDCs do not apply to prepaid forex cards. However, if the student has been issued an international debit or credit card, there will be no TCS levied until Rs 7 lakh has been spent.
TCS is assessed when transferring currency onto a Forex card. Such currency cannot be restricted to educational use only. Therefore, it is impossible for an authorised dealer to know the intended use of the currency at the moment he loads the card.
“If the forex card is exempted solely on the basis of a declaration, the risk of abuse would be very high, as people would make false declarations to avoid TCS,” said Ankit Jain.
Since there is no distinct definition for “education purposes,” the bank might only classify payments made directly to colleges as “education.” Consequently, direct expenditures by parents for living expenses such as rent, food, etc. cannot be classified as education when made with a foreign currency card. Jain added, “These payments would then be subject to a TCS rate of 20% with no basic threshold, even if made via a Forex card recharged by the parents in India.”
