20 percent taxation from July 2023: Understanding the Recent Changes in Repatriation Taxes for NRIs

In today's globalized world, financial matters can often be complex, especially for Non-Resident Indians (NRIs). The topic of 20 percent taxation on repatriation of funds has been a subject of interest and concern for NRIs both in India and abroad, particularly since the amendments set to take effect from the first of July 2023. In this blog post, we'll look at the finer points of the law surrounding these changes, exploring the implications for NRIs and shedding light on the key aspects you need to know.

Who is Affected by the Amendments?

A burning question many NRIs have is whether these new regulations apply to them. The answer hinges on understanding the provisions of the Income Tax Act, specifically Section 206C(1G). To break it down, the new regulations are targeted at individuals categorized as "resident" under the Foreign Exchange Management Act (FEMA). This category includes Overseas Citizens of India (OCIs) and other non-resident Indians (NRIs) who can maintain specific types of bank accounts like Non-Resident Ordinary (NRO) accounts and Foreign Currency Non-Resident (FCNR) accounts, but cannot hold normal resident Savings Bank accounts or deposits.

Applicability of TCS on Repatriation

The key to understanding the applicability of Tax Collected at Source (TCS) on repatriation lies in three simple conditions. If an individual is a resident, repatriates foreign currency from a bank, and transfers this currency to a person or country outside India under the Liberalized Remittance Scheme (LRS), then TCS applies under section 206C(1G) of the Income Tax Act. It's worth noting that this provision has been a part of the law for about two years, with amendments made over time.

Clarification for NRIs

The common concern among NRIs is whether they are subject to TCS. It's essential to clarify that the TCS under discussion applies exclusively when funds are repatriated under the LRS scheme, which is specifically designed for resident individuals repatriating funds from India. This means that the broader NRI community is exempt from this particular tax.

Avoiding Violations and Penalties

It's important for NRIs to be aware of the financial regulations to avoid violations. One significant aspect pertains to holding Savings Bank accounts meant for resident Indians. NRIs should promptly convert or close these accounts to comply with FEMA regulations. Attempting to repatriate funds from these accounts under LRS could lead to multiple violations and penalties.

Understanding TCS: A Tax Collection Mechanism

TCS is not a final tax payment but rather a mechanism for collecting taxes in advance as a preventive measure against tax evasion. If you're repatriating funds from India, a portion of the amount (5% or 20%, depending on the scenario) is collected by the bank as TCS. When you file your tax return, you can claim this TCS as an advance tax payment and offset it against your actual tax liability. Any excess amount collected will be refunded.

Amendments and Exceptions

The recent amendments to the TCS framework bring changes to specific scenarios. For instance, if an individual is repatriating funds for education or medical treatment, the TCS rate remains at 0.5% or 5% respectively if the remittance exceeds ₹7,00,000 in a financial year. However, if the remittance is for overseas tour packages, the TCS rate has increased from 5% to 20% without any threshold, effective from 1st July 2023. These amendments refine the TCS application based on the purpose of repatriation.

Final Thoughts

Understanding the nuances of tax regulations and amendments is crucial for NRIs seeking to repatriate funds from India. While the recent changes have specific implications, they do not apply uniformly across all scenarios. It's recommended for NRIs to stay informed, comply with regulations, and seek professional advice when needed to navigate these financial matters effectively. By being well-informed, NRIs can make the most of their financial transactions and contributions while staying compliant with the law.