What is Tax Collection at Source (TCS)? Here’s a primer

There are certain new tax collection at source (TCS) rules that came into force from October 1, 2020 under the Income Tax Act 1961. While many of these provisions relate to goods and services, there are some that directly impact individuals. Before we get into how these provisions impact you, let us understand the ‘what’ and ‘how’ of TCS.

What is TCS?

Tax collection at source is the Income Tax Department’s way of sifting out certain high-value transactions under section 206C of the Income Tax Act. Transactions such as purchase of car for an amount exceeding ₹10 lakh, foreign currency remittances, and sale of goods above ₹50 lakh, among others, come under the ambit of TCS provisions.

How is TCS collected?

TCS is calculated on transactions beyond a certain threshold. Once these transactions breach that threshold, TCS is calculated on the value of the transaction. This amount is added to the transaction value and collected from the buyer or service recipient by the seller or service provider.

If the TCS to be collected is 1 per cent of a car purchased worth ₹15 lakh, then the TCS amount would be ₹15,000. You will have to pay ₹15,15,000 to the car dealer you have purchased the vehicle from.

The TCS amount will be recorded against the Permanent Account Number or PAN of the income tax assessee. This amount will be knocked off against the income tax liability of the assessee, if any, for the financial year in which the TCS was collected. Essentially, your tax outgo will reduce by the amount of TCS just like it does with tax deducted at source (TDS).

Changes from October 2020

The new amendments to the TCS provisions are relevant for those who make purchases in foreign currency, foreign currency remittances, purchase of an overseas tour package in foreign currency from a foreign tour operator, and invest in shares abroad. All these come under Reserve Bank of India’s Liberalised Remittance Scheme (LRS) that allows Indians to remit up to $2,50,000 a year abroad.

From October 1, 2020, while making purchases in foreign currency online through your debit card, credit card, or through online banking, tax will be collected at source by your bank or credit card company at 5 per cent of the value of the transaction on amounts exceeding ₹7 lakh a year. This is over and above any transaction fees that might be collected by the bank or credit card company. In case such aggregate purchases in a financial year are above ₹7 lakh, then TCS provisions will apply to the amount in excess of ₹7 lakh. This limit will be applied for transactions undertaken with an individual bank or credit card company.

For example, if you have made purchases online worth ₹15 lakh, then the TCS will not be applicable till the aggregate purchases cross ₹7 lakh. For each purchase above ₹7 lakh, TCS will be applicable. In case you have made three purchases above the threshold of ₹3 lakh, ₹3 lakh, and ₹2 lakh, then TCS on these transactions will be ₹15,000, ₹15,000 and ₹10,000. These TCS amounts will be billed to your account or credit card statement.

Then there is remittance of foreign currency for the purpose of education. The threshold for TCS applicability remains the same (above ₹7 lakh) and the rate of TCS is 5 per cent of the amount exceeding ₹7 lakh. However, there is a difference in the rate of TCS for foreign remittance for education purposes made by obtaining a loan and one made from own funds. TCS on foreign currency remittances above ₹7 lakh made for education by obtaining a loan (proofs will be demanded by the bank) will be at 0.5 per cent.

Investors who make investment in shares abroad by using the LRS will also be covered by the new TCS provisions. While making investments in shares abroad, the aggregate foreign remittance amount exceeding ₹7 lakh will be liable to TCS. The intermediary that allows you to make such investments will charge you the TCS once the total investment exceeds ₹7 lakh in a financial year.

Any other foreign currency remittance made under LRS will also be covered by the TCS provisions and the threshold limits of ₹7 lakh will apply. The TCS will be collected at 5 per cent of the value of remittance above ₹7 lakh.

For financial year 2020-21, the calculation of aggregate foreign currency remittance above ₹7 lakh will be considered from October 1, 2020 onwards only, and not for the entire financial year. From April 1, 2021 onwards, the TCS provisions will apply for the full financial year.

In case of a foreign currency remittance made for purchase of overseas tour package, there is no threshold limit of aggregate remittances of ₹7 lakh. Any such foreign currency remittance for purchase of an overseas tour package will be liable for TCS of 5 per cent.

In case the remitter of foreign exchange does not produce PAN, or the bank account does not have the PAN registered against it, TCS will be calculated at 10 per cent of the remittance amount.