How do TCS Rules Make Abroad Education Loans More Rewarding?

It is ideal to begin with understanding what TCS is. TCS stands for Tax Collection at Source, and it is the additional amount the seller of specified goods gets as tax from the customer to be remitted to the government's account. 

• Union Budget 2020 has brought a new rule according to which a 5% Tax Collection at Source (TCS) is applicable to the forex remittances of INR 7 lakh or more in a financial year.
• The new TCS rule comes under the Liberalized Remittance Scheme (LRS).
• This new rule on foreign exchange transactions has been in place since 01 October 2020.
   

To start with some basics, the Liberalized Remittance Scheme (LRS), under the RBI guidelines, allows an individual to remit up to $250,000 (around INR 1.83 crore) in a financial year for expenses such as education and travel, as well as investing in the foreign stock markets. 

From October 01, 2020 onwards, this new limit is INR 7 lakh for foreign exchange remittances. This scheme is not applicable to corporates, non-resident Indians (NRI), firms, and trusts, among others. In short it means that  if you want to fund your overseas education (which requires certainly more than 7 lakhs), the tax you pay is 5% of the amount minus 7 lakhs. 

The following are the major takeaways from the new TCS rules valuable for an education abroad aspirant: 

• A tax of 5% is applicable on an amount more than  INR 7 Lakh in a financial year (not on the total amount).
   
• If the amount is remitted for abroad education purposes through an education loan from any authorized financial institution, the TCS on foreign remittance for education shall be 0.5% on the amount more than INR 7 lakhs.
   
• The TCS is collected at the time of receipt of the amount or while debiting the amount payable, whichever is earlier.
   
• The TCS rates are increased by an applicable surcharge and Health & Education Cess if the remitter is a non-resident as per the Income-Tax Act, 1961.
   
• If the remitter does not furnish his/her PAN details, the TCS will be 10% instead of 5%.
   
• GST will not be applicable to the TCS amount.
   
• The TCS is reflected as a tax credit in Form 26AS. Therefore, the amount of TCS can be claimed as a credit against tax payable while filing the ITR. If the TCS is higher than your payable tax, you will get a refund.

The tax is collected at source only on the remitted amount above INR 7 lakh. For example, if someone remits INR 10 lakh in a year, 5% TCS will be calculated on INR 3 lakh i.e. INR 15,000 will be deducted as TCS.

Now comes why education loans for abroad studies is the best choice over self-funding under the TCS rules:

• If you are financing your study abroad without a loan, you need to remit a tax of 5% to the bank. According to the TCS rule, authorized dealers such as banks and remittance companies collect the 5% TCS once the foreign remittance made by a person crosses INR 7 lakh in a financial year.
   
• At the same time, the tax you need to pay for overseas education loans is only 0.5%, which is a difference of 4.5%.

Given that education abroad is quite expensive, this difference can be a considerable savings in the amount you need to spend for education abroad. Therefore, students taking an education loan to finance their studies abroad have a notable saving on the tax amount.

Here’s how the new TCS rules make the abroad education loans a smart option for students. Only 0.5% TCS is applicable to the transfer amount of more than INR 7 lakh if the educational expense is financed through an education loan. However, if the educational funds are not arranged through an education loan, a 5% tax on the amount transferred above INR 7 lakh will be deducted.

It means that if a student takes financial assistance from anyone other than authorized financial lenders like public sector banks, private banks, and NBFCs, the tax amount will be added to the financial burden.

Let us understand it better with an example. Ashok, who is sending INR 12 lakh to his son studying in America, has to pay a TCS of INR 25,000 (5% of 12 lakh-7 lakh) if the funds are not arranged through an education loan. If Ashok's son has taken an education loan for his studies abroad, the applicable TCS will be INR 2,500 (0.5% of 12 lakh-7 lakh).

Therefore, these TCS rules changed in 2020 have made taking an education loan to study abroad preferable and economical for students and parents.

Since abroad education loans are the best choice to fund the abroad studies, here’s where GyanDhan comes to your help. Students can get in touch with us and our education loan counselor will suggest the best education loan options depending upon the overall profile.

• GyanDhan is an education financing marketplace and has partnered with government banks like SBI, private banks like Axis and ICICI, and several NBFCs.
   
• The entire loan process is  online and students can get everything done from the comfort of their home.
   
• The counselor provides assistance throughout the process- from application to the disbursement. 
   
• What’s more! This counseling is offered entirely free of cost.