18 Oct 2024Understanding the New TCS Rule
From October 1, 2023, a new rule requires travellers to pay a Tax Collected at Source (TCS) of 20% on overseas tour packages exceeding Rs 7 lakh in a financial year. For packages costing up to Rs 7 lakh, the TCS rate is 5%. This rule applies to bookings made both online and offline, regardless of whether you book through domestic or international travel agents. To ease the financial burden of TCS, here are some strategies to minimize or avoid this tax when planning your next international trip.
Tip 1: Book Separately to Avoid the Tour Package Classification
A simple way to avoid the high TCS rate is to book your flights, hotels, and sightseeing activities separately rather than as a single tour package. The Ministry of Finance defines an overseas tour package as one that includes at least two of the following: international travel ticket, hotel accommodation, or other related expenses. By booking each component individually, you can avoid having your trip classified as a tour package and, consequently, the 20% TCS.
Tip 2: Utilize the Rs 7 Lakh TCS Threshold
The Rs 7 lakh threshold is an important factor in reducing your TCS liability. TCS is not only applicable to tour packages but also to remittances exceeding Rs 7 lakh in a financial year. However, this threshold can be utilized per individual per financial year. When traveling with family or a group, different members can book different components of the trip to stay within the Rs 7 lakh limit each. For example, one person can book the flights while another books the hotel accommodation, thereby taking advantage of the exemption.
Tip 3: Use International Credit Cards
Currently, international credit card transactions are not subject to TCS. Using an international credit card for your foreign trip expenses can help you avoid the additional tax liability. However, it's essential to consider the additional charges that may come with using a credit card abroad, such as foreign transaction fees and currency conversion charges. Always check these details with your credit card provider before making large payments.
Tip 4: Be Cautious When Booking on Foreign Websites
While it may be tempting to book through foreign travel websites to avoid TCS, it's crucial to be cautious of fraudulent platforms. Ensure the website is legitimate by checking customer reviews, ratings, and secure payment gateways like Visa, Mastercard, or PayPal. Look for websites with valid SSL certificates and HTTPS encryption. Verify contact details such as physical addresses, phone numbers, or email addresses to ensure the platform's authenticity.
Additional Insights
TCS is Not an Additional Tax
Remember, TCS is not an extra tax; it is an advance tax that can be adjusted against your tax liability when filing your income tax return (ITR). If you have no tax liability, you can claim a refund of the TCS amount. However, paying TCS upfront can create a cash flow crunch until you receive the refund, so it's important to plan your finances accordingly.
Understanding TCS Thresholds
There are distinct thresholds for TCS under the Liberalized Remittance Scheme (LRS) and for the purchase of overseas tour packages. The Rs 7 lakh threshold under LRS is used to determine whether TCS is applicable. For overseas tour packages, the Rs 7 lakh threshold is used to determine the applicable TCS rate (5% or 20%). These thresholds apply independently, providing some flexibility in managing your TCS liability.
Let's Understand it Better with Examples
Example 1: Multiple Expenses in a Financial Year
Consider the case of A, who books an overseas tour package worth Rs 5 lakh in November. In January, A travels abroad for medical treatment costing Rs 4 lakh. In February, A books another tour package worth Rs 4 lakh. How much TCS will be deducted, and who will collect it?
For the first tour package in November costing Rs 5 lakh, TCS will be levied at 5%, amounting to Rs 25,000. The seller of the overseas tour package is responsible for collecting this TCS.
For the medical treatment in January, TCS would apply at 5% if the amount exceeds Rs 7 lakh. However, since A has only spent Rs 4 lakh through the LRS route, no TCS will apply. A must provide an undertaking to the authorized dealer or bank stating the purpose of the remittance and affirming that it does not surpass the Rs 7 lakh threshold.
For the February tour package worth Rs 4 lakh, TCS will be calculated as follows:
- On the first Rs 2 lakh (the remaining amount within the Rs 7 lakh threshold after the November package), TCS will be 5%.
- On the remaining Rs 2 lakh (amount exceeding the Rs 7 lakh threshold), TCS will be 20%.
Therefore, for the February package, A will pay TCS at 5% on Rs 2 lakh (Rs 10,000) and TCS at 20% on the remaining Rs 2 lakh (Rs 40,000), totaling Rs 50,000.
Example 2: Sequential Bookings
Now, consider B, who books an overseas tour package worth Rs 6 lakh in October and another package worth Rs 4 lakh in January. How much TCS will be deducted, and who will collect it?
For the first booking in October costing Rs 6 lakh, the seller will collect TCS at 5%, amounting to Rs 30,000. B must provide an undertaking to the seller confirming that no amount over Rs 7 lakh has been spent on overseas tour packages in the financial year.
For the January package costing Rs 4 lakh, TCS will be calculated as follows:
- On the first Rs 1 lakh (the remaining amount within the Rs 7 lakh threshold after the October package), TCS will be 5%.
- On the remaining Rs 3 lakh (amount exceeding the Rs 7 lakh threshold), TCS will be 20%.
Therefore, for the January package, B will pay TCS at 5% on Rs 1 lakh (Rs 5,000) and TCS at 20% on the remaining Rs 3 lakh (Rs 60,000), totaling Rs 65,000.
By following these tips and understanding the nuances of the new TCS rules, you can effectively plan your international travel and minimize the financial impact of TCS on your trip. Happy travels!