TCS on Foreign Remittance

If you are sending money abroad under the Liberalised Remittance Scheme (LRS), TCS on foreign remittance is a cost you cannot ignore. Tax Collected at Source (TCS) under Section 394(1) of the Income Tax Act, 2025 [Old: Section 206C(1G) of the IT Act, 1961] applies to every LRS remittance exceeding ₹10 lakh in a financial year — at rates ranging from 2% to 20% depending on the purpose. This guide explains every aspect of TCS on foreign remittance: the current rates after Finance Act 2026, how to claim your TCS refund, the new lower TCS certificate under Section 395(3), and how to plan remittances to minimise the cash-flow impact.

TCS (Tax Collected at Source) on foreign remittance is a tax that your bank collects from you at the time of processing an outward remittance under the Liberalised Remittance Scheme (LRS). It was introduced in October 2020 to create an audit trail for foreign remittances and has since undergone multiple rate changes — most recently through Finance Act 2026.

Under the new Income Tax Act, 2025 (effective 1 April 2026), all TCS provisions have been consolidated into a single Section 394, replacing the old Section 206C and its multiple sub-sections. LRS remittances are covered under Serial Number 7 of the Section 394(1) table, while overseas tour packages fall under Serial Number 8.

Who Collects TCS?

The AD bank — any bank authorised by RBI under FEMA Section 10(1) to deal in foreign exchange — is responsible for collecting TCS on LRS remittances. For tour packages, the tour operator or Online Travel Agent (OTA) selling the package collects TCS at the point of sale.

TCS vs TDS — A Common Confusion

TCS on foreign remittance is frequently confused with TDS on payments to non-residents. They are fundamentally different:

In one sentence: If you are sending money abroad for yourself (education, travel, investment), it is TCS. If you are making a payment to a non-resident that is taxable in India (rent, property purchase, professional fees), it is TDS.

An important interaction: Section 394(5) [Old: fifth proviso to Section 206C(1G)] provides that if TDS has already been deducted on the payment under Section 393, then no TCS is collected on the same amount. This prevents double taxation.

The Finance Act 2026 (Union Budget 2026, effective 1 April 2026) significantly rationalised TCS rates on foreign remittance. Here is the complete rate table applicable from FY 2026-27 onwards:

TCS Rate Table — Section 394(1)

What Changed in Finance Act 2026 (Budget 2026)?

How the ₹10 Lakh Threshold Works

The ₹10 lakh threshold is cumulative across all LRS purposes, all modes of payment, and all AD banks in a financial year (April to March):

• It is per individual PAN, not per transaction or per bank
• It covers education + medical + investment + gifts + all other LRS purposes combined
• You do not get separate ₹10 lakh thresholds for each purpose
• Tour packages (Sl. No. 8) are excluded from this threshold — they attract TCS from the first rupee
• Banks track cumulative remittances against each PAN through RBI's daily CIMS reporting

Cumulative Calculation Example

If you remit during FY 2026-27:

• ₹6,00,000 for education (S0305)
• ₹3,00,000 for medical treatment (S0304)
• ₹5,00,000 for overseas investment

Total cumulative LRS remittance = ₹14,00,000. The first ₹10 lakh is exempt. TCS applies on the excess ₹4,00,000. Since ₹4 lakh was the investment tranche (which pushed the total above ₹10L), TCS at 20% applies on that portion = ₹80,000.

Double Collection Prevention — Section 394(4)

Section 394(4)(a) explicitly prevents double TCS:

• If a tour operator has already collected TCS under Sl. No. 8, the bank does not collect TCS again under Sl. No. 7 on the same amount
• If the buyer has already deducted TDS under another provision, no TCS is collected under Sl. Nos. 7 or 8

The Income Tax Act, 2025 introduces a genuinely new right for LRS remitters: the ability to apply for a lower or nil TCS certificate under Section 395(3). This was not available under the old Act — Section 206C(9) of the 1961 Act explicitly excluded LRS remittances.

Worked Example: Lower TCS Certificate

Education remittances receive the most favourable TCS treatment under Section 394(1). Here is how the two sub-categories work:

Loan-Funded Education — Complete TCS Exemption

If your education abroad is funded by a loan obtained from a financial institution as defined under Section 129 [Old: Section 80E], no TCS is collected — regardless of the amount. Whether you remit ₹5 lakh or ₹50 lakh, the TCS is nil.

Self-Funded Education — 2% Above ₹10 Lakh

If you (or your parents) are funding education abroad from personal savings or income:

• First ₹10 lakh in the FY (cumulative across all LRS purposes): No TCS
• Amount exceeding ₹10 lakh: 2% TCS (reduced from 5% by Finance Act 2026)

Partial Loan + Partial Self-Funding

When education expenses are funded through a mix of loan and personal funds, each portion is assessed independently:

Parent vs Student — Who Should Remit?

Example: Splitting Remittances Between Parents

For a ₹25 lakh education remittance:

• Single remitter: TCS = 2% on ₹15 lakh = ₹30,000
• Split between parents (₹12.5L each): TCS = 2% on ₹2.5L × 2 = ₹10,000 — saving ₹20,000

Misclassification Risk — Purpose Code Matters

Banks classify education remittances under RBI purpose code S0305. If the bank does not receive adequate documentation (admission letter, fee invoice), it may reclassify the transfer as S1301 ("Family Maintenance"). This changes the TCS rate from 2% to 20% on amounts above ₹10 lakh — a tenfold increase.

Finance Act 2026 brought the most dramatic change for tour packages. The old two-tier structure (5% up to ₹10 lakh + 20% above ₹10 lakh) has been replaced with a flat 2% TCS from the very first rupee — no threshold.

What Qualifies as a "Tour Package"?

Under Section 402(26) of the IT Act, 2025, an "overseas tour programme package" means any package offering a visit outside India that includes expenses for travel, hotel stay, boarding, lodging, or any other expenditure of similar nature. The key word is "package" — a bundled offering combining at least two components:

Worked Example: ₹20 Lakh Family Tour Package

Medical Tourism Packages — Watch the Classification

If your purpose is genuinely medical treatment, remit directly to the foreign hospital through the bank under LRS purpose code S0304. This qualifies for the ₹10 lakh threshold exemption under Sl. No. 7.

Buying a "medical tourism package" from a tour operator (travel + hospital + accommodation bundled) classifies as Sl. No. 8 — flat 2% from the first rupee with no threshold. Although both rates are now 2%, the threshold difference matters: under Sl. No. 7, your first ₹10 lakh is TCS-free.

The status of TCS on international credit card spending has been one of the most debated topics in this space.

TCS is fully refundable if your total income tax liability for the year is less than the TCS collected. Here is the complete process:

Three Ways to Use TCS Credit (Don't Wait for Refund)

Interest on Delayed Refunds — Section 437

If the department delays your refund, you earn simple interest at 0.5% per month (6% per annum) under Section 437 [Old: Section 244A]:

• Interest runs from 1 April of the assessment year (if ITR filed on time) or from date of filing (if late)
• Interest is taxable as "Income from Other Sources" in the year received
• Interest applies only if refund exceeds 10% of total tax payable

What If TCS Is Not Reflected in Form 168?

You cannot "avoid" TCS entirely — it is a statutory obligation. But there are legal strategies to reduce the cash-flow impact:

1. Use the education loan route. A loan from a recognised financial institution means zero TCS regardless of amount. Even if you have the funds, taking a loan purely for TCS exemption may make financial sense — you can prepay it immediately after remittance.
2. Family member pooling. Each family member has their own ₹10 lakh threshold. Two parents = ₹20 lakh TCS-free. Add the student = ₹30 lakh. Distribute remittances across PAN holders where the underlying purpose is legitimate.
3. Time remittances across financial years. Splitting a ₹25 lakh remittance into ₹12.5 lakh in March and ₹12.5 lakh in April means ₹10 lakh exempt in each FY = ₹20 lakh exempt vs ₹10 lakh if remitted in a single FY.
4. Apply for lower TCS certificate under Section 395(3). File Form 128 electronically if your tax liability is demonstrably lower than the TCS that would be collected.
5. Use Form 12BAA for immediate offset. If you are salaried, submit TCS details to your employer to reduce monthly salary TDS — don't wait for the ITR refund cycle.
6. Book tour packages through operators. At flat 2% with no threshold, tour packages now have the same rate as education/medical. But for spending under ₹10 lakh, self-arranging avoids TCS entirely.

TCS under the Income Tax Act and FEMA compliance under the Foreign Exchange Management Act are separate obligations that run in parallel. AD banks serve as the enforcement node for both regulatory frameworks simultaneously:

TCS on foreign remittance has undergone four major phases since its introduction. Understanding this history helps contextualise the current regime:

The trajectory is clear: the government is gradually reducing TCS rates on education, medical, and travel while maintaining the 20% rate on investment-purpose remittances to monitor capital outflows.

Scenario 1: Parent Sending ₹30 Lakh for Education (Self-Funded)

Scenario 2: Investor Remitting ₹50 Lakh for US Stocks

Scenario 3: Couple Buying Dubai Property — ₹2 Crore

Scenario 4: Mixed-Purpose Remittances in One FY

Scenario 5: ₹20 Lakh Tour Package vs Self-Arranged Travel

While TCS collection is automatic (your bank handles it), there are scenarios where professional guidance saves money and prevents complications:

• Large investment remittances (>₹25 lakh): The Section 395(3) lower TCS certificate can save lakhs in blocked cash. The application requires a Form 128 filing with supporting computation, followed up with the Assessing Officer until disposal.
• Multiple remittances across purposes: When education, investment, and travel remittances fall in the same FY, the TCS rates differ for each. Proper allocation, purpose code verification, and threshold tracking matter.
• TCS-ITR mismatch or credit denial: If TCS does not appear in Form 168 [Old: Form 26AS], the AD bank must file a Form 143 correction. If the CPC denies credit, a Section 287 [Old: Section 154] rectification application is the remedy.
• Form 12BAA preparation: Form 12BAA submitted to the employer captures TCS already collected and adjusts salary TDS accordingly.
• Cross-border tax planning: TCS is one component. When combined with DTAA benefits, Form 145/146 obligations, Schedule FA declarations, and Foreign Tax Credit claims, a holistic approach saves significantly more.

*This article is part of our comprehensive Liberalised Remittance Scheme (LRS) Guide. Related articles: Form 145/146 Filing Guide | LRS for Education | FEMA Penalties | Buying Property Abroad | LRS for Travel & Credit Cards | *DTAA & Foreign Remittance Tax