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Will education abroad be a headache? Things to know about the revised TDS on overseas studies

TDS on overseas studies

Studying abroad can provide students with personal growth, increased independence, and the ability to adapt to new environments. Building a network of international contacts, students, economies, and political systems. Studying in another country also provides opportunities to acquire international communication skills, which are highly appreciated in many fields, and to learn a new language.

But paying for travel, housing, and living expenses on top of the cost of studying abroad is a common problem for students. Many students rely on scholarships, grants, and loans to finance their overseas education. Students must carefully consider their options and plan their finances to ensure they can afford their education and living expenses while studying abroad.

There are certain taxes to be paid while remitting money abroad. 

The tax collection at source (TCS) for foreign remittances under LRS increased from 5% to 20% in Budget 2023. International travel, money transfers, and other remittances are all subject to this restriction, except payments for health and education. The policy will become effective on July 1, 2023. Does it cost more for parents to send their kids to study abroad? The new TCS legislation and how it will function as of July 1, 2023. In this blog, let us discuss the TCS on education abroad.

TCS on Education Abroad

According to the Amendments in 2020, which came into effect on October 1 2020, TCS amounting to 5% on Foreign Remittance will be levied on every amount more than Rs 7,00,000. If the Foreign Remittance is for remitting money for overseas educational purposes (only if the payment is from an educational loan), the rate applied is 0.5% of the amount remitted.

Amendment for TCS on Education Abroad

Parents now have to spend a lot on their kids studying abroad. Tax collection at source (TCS) for international transfers made under the liberalised remittance scheme (LRS) was suggested to increase from 5% to 20% in the Union Budget 2023. It will apply to international travel, investments, money transfers, and other remittances—except those for health and education. However, there are extra expenses parents must cover for/ their children who live abroad and which cannot be included in the cost of their education.

Remittances made using Educational Loans for studying abroad

Under LRS, remittances made for overseas schooling through a loan paid abroad are subject to a TCS of 0.5% for amounts sent beyond Rs 7 lakh. Future events will remain the same, too. If an education loan is not the funding source, money sent abroad, even for educational purposes, is subject to TCS at a rate of 5% if it exceeds Rs 7 lakh.

Increased TCS on Study Abroad

20% TCS on financing additional costs for studying abroad Currently, a TCS of 5% is applied on remittances for foreign education that exceed Rs 7 lakh (other expenditures not covered by an education loan). On transfers worth less than Rs 7 lakh, there is no TCS. The Rs. 7 lakh limitation for all expenditures other than those for education and medical care has been eliminated in Budget 2023.

According to the current plan, any remittances made to help students studying abroad with expenses for basic living needs that are not directly related to their education would now be subject to a 20% TCS if the parents cannot prove that the funds were sent for educational purposes.

Education costs for TCS at 5%or lower.

Parents frequently send money to their children studying or working overseas to cover living costs and other luxuries. Once the sum surpasses Rs 7 lakh, a TCS of 5% would be applied unless they can show that the money is being delivered for educational reasons.

Demonstrating the funds moved for dorm (accommodation) bills or tuition costs is simple. If your child lives at the university’s residence hall, you can prove it is for educational purposes. Afterwards, a TCS of 5% will be applied if the remittances are more than Rs 7 lakh.But it could be much more difficult for those who live in apartments, shared homes, or rented housing to prove their connection to education.

One must visit the bank/any service provider, complete Form A-2, state the reason for the transfer, and sign the declaration form to send money overseas via LRS. The bank/service operator then debits the account and sends the money overseas. The funds will be forfeited if a parent cannot prove that it is being used for their child’s education abroad and will be transferred for the “other purpose,” which will incur a hefty TCS of 20%.

Will TCS hike increase the financial burden?

The proposal coming to effect from July 1 2023, will burden anyone paying TCS on any foreign remittance. Even if the amount of TCS could be offset against the tax due, the rise from 5% to 20% would dramatically raise the burden on anyone sending cash via the LRS system. Let’s say a taxpayer sent Rs 10,000 in total. A TCS of Rs 2,000 will be applied to the sum at a 20% rate. If he owes Rs 5,000 in taxes on his whole income, he must pay Rs 3,000 since the remaining Rs 2000 would be deducted from his TCS amount. Therefore, while submitting an income tax return, taxpayers may balance the amount deducted as TCS against other tax liabilities. 

Although taxpayers can deduct or receive a refund of this money when completing their ITRs, this decision will impact cash flow and may discourage people from using LRS.

What advantages do student loans have over self-funding?

Following TCS regulations, student loans are preferable to self-funding for those studying abroad:

If you are paying for your study abroad trip out of pocket, you must pay the bank a 5% tax. The 5% TCS is collected by authorised dealers, including banks and remittance firms, per the TCS law, anytime a person sends more than INR 7 lakh abroad in a fiscal year. In contrast, there are changes in the amount if a student loan is taken out for their studies abroad. 

Contact Unimoni to get better tax-saving options & other advantages. Enjoy substantial savings while remitting money through Unimoni. Talk to our Forex expert now!

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