Forex Transactions is a term which leads to transferring funds from one country to another. There could be various reason like personal as well as business-related reasons due to which funds are required to be remitted abroad.
Now in this article we will understand what the tax implications on Forex transactions are? What is the process for paying tax on Forex transactions? What exactly is Liberalized Remittance Scheme?
Let’s go through this article to get the answers to all these questions –
What is Liberalized Remittance Scheme (LRS)?
Under the LRS scheme, a resident person can remit outside India funds up to USD 2, 50,000 without prior permission of RBI for the financial year 01 April to 31 March. This scheme is available only for Individuals (including minors) and not for HUF, corporates, partnership firms, LLPs etc.
What kind of Transactions that an Individual can engage in under Liberalized Remittance Scheme (LRS)?
A resident Individual is allowed to engage in any Current account or Capital account transaction or a blend of both.
Permissible capital account transaction involves buying of property abroad, opening foreign currency account overseas with a bank, investing in shares by acquiring listed & unlisted stocks, lending loans to NRI, and setting up a wholly-owned subsidiary or a joint venture governed by the provisions placed by the FEMA (Foreign Exchange Management Act).
Permissible current account transaction comprises of private visit, grants, going abroad for employment or emigration purposes or for taking care of relatives, business and medical purposes, studies, facility to grant loan in rupee to non-resident individual or person of Indian origin and close relatives under the scheme and other current account transactions allowable under the Foreign Exchange Management Act.
Tax Implications on Forex Transactions :-
- According to the section 206C (1G) of the Income-tax Act, 1961, Forex transactions are liable to tax if the amount exceeds a specific limit. The limits can have variation from time to time.
- The existing rules have got effective from 01 October, 2020, as per the Finance bill, 2020. As per the provisions of the Income-tax Act, an amount of up to INR 7 lacs per financial year is exempt from tax liability.
- Amount exceeding INR 7 lacs would be liable to tax and tax has to be paid on TCS (Tax Collected at Source) basis.
- In the case of international tour packages, Travel Company would collect TCS irrespective of the package cost, and the Tax Collected at Source would be applicable to individuals on the entire amount of payments. The threshold limit of INR 7 lacs is not applicable in this case.
- Currently, the tax rate applicable on payment over and above INR 7 lacs is 5%, and for education loan transactions, it is 0.5%.
- In case of non-availability of PAN of the individual, TCS is applicable at 10%.
- In some example, GST is leviable for currency conversion and on remittance charges. Such GST charges are not considered for making Tax Collected at Source collection.
- In order to claim a refund on account of such tax collected at source or to adjust it with overall tax liability, the individual has to file his/her Income Tax return within prescribed due dates.
Summing-up:
- The resident individuals can freely enter into a transaction of up to $2,50,000 under the Liberalized Remittance Scheme of RBI for a particular FY from 1st April to 31st March.
- A resident individual can enter into Current and Capital account transactions or a blend of both these kinds of transactions prescribed by the Reserve Bank of India according to the guidelines of the FEMA (Foreign Exchange Management Act).
- Effective from October 1, 2020, foreign exchange transactions of up to INR 7 Lacs in a financial year are free from tax liability. Amount exceeding INR 7 Lacs is liable to TCS (Tax collected at Source) in the hands of the individual at 5% and 0.5% in case of education loan transaction.
- Individuals can claim tax refund or adjust the tax collected with overall tax liability by filing the ITR.
- There is no minimum threshold limit for collecting tax for tour packages.