LRS TCS Changes: Your Guide to the New 2026 Tax Rules

Key Takeaways

• TCS Rate Reduction: For foreign remittances towards education and medical treatment, the Tax Collected at Source (TCS) rate on amounts exceeding ₹10 lakh is reduced from 5% to 2%, effective April 1, 2026.
• Consolidated Legal Framework: All provisions related to TCS, previously under Section 206C of the Income Tax Act, 1961, will be consolidated under Section 394 of the new Income Tax Act, 2025, starting from the tax year 2026-27.
• No Change in Adjustment Mechanism: The method for adjusting TCS against final tax liability remains consistent. The amount collected as TCS will continue to be reflected in your Form 26AS and can be claimed as a credit against your total tax liability or refunded if it exceeds the amount due.
• Simplified Terminology: The new Direct Tax Code eliminates the confusing "Previous Year" and "Assessment Year" terminology, adopting a unified "Tax Year." The financial year in which income is earned is now also the year it is reported.

PART 1: EXECUTIVE SUMMARY

This guide provides a detailed overview of the changes in Tax Collected at Source (TCS) on foreign remittances under the Liberalised Remittance Scheme (LRS), marking the transition from the Income Tax Act, 1961, to the new Income Tax Act, 2025, effective April 1, 2026.

• The Old Law (1961): Under the Income Tax Act, 1961, TCS was levied on foreign remittances exceeding certain thresholds. For education and medical purposes, a 5% TCS was applicable on the amount exceeding ₹7 lakh (which was later increased to ₹10 lakh). For other purposes, the rate was significantly higher at 20% above the threshold. This collected tax could be set off against the individual's final income tax liability during the filing of their tax return.

• The New Law (2025): The Finance Act, 2025, as part of the transition to the new Direct Tax Code, introduces key changes effective from the tax year 2026-27. The most notable change is the reduction of the TCS rate for remittances for education and medical purposes to 2% on amounts exceeding the ₹10 lakh threshold. For overseas tour packages, the rate is also proposed to be reduced to a flat 2%. All TCS provisions are now consolidated under a single new section for better clarity. The fundamental process of claiming the TCS as a credit against tax liability remains unchanged.

• Who is Impacted: This change primarily affects Indian residents who remit money abroad for their children's education, for medical treatment for family members, or for other personal reasons under the LRS. Students pursuing education overseas and families funding medical treatments abroad will see a direct benefit from the reduced upfront tax collection. Salaried individuals who make such remittances will find it easier to manage cash flows, as less tax will be collected at the source.

PART 2: DETAILED TAX ANALYSIS

1. Background on Foreign Remittances

Foreign remittances by resident individuals are governed by the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). LRS permits resident individuals to remit up to USD 250,000 per financial year for any permissible current or capital account transaction, or a combination of both. These transactions include expenses related to travel, education, medical treatment, gifts, donations, and investments in overseas shares or property.

To ensure tax compliance on such transfers, the Government introduced the mechanism of Tax Collected at Source (TCS) through the Finance Act. Under this system, the authorized dealer (AD) bank, responsible for facilitating the remittance, is mandated to collect a certain percentage of the remitted amount as tax from the remitter. This is not an additional tax but an advance income tax collected at the source. The remitter can claim this amount as a credit against their total income tax liability when filing their annual Income Tax Return (ITR).

2. Rule Shift: Old Act vs Direct Tax Code 2025

The transition from the Income Tax Act, 1961 to the new Income Tax Act, 2025 (referred to as the Direct Tax Code for the purpose of this transition) brings structural and rate-specific changes to the TCS regime on foreign remittances. The core principle of collection and subsequent adjustment remains, but the legal framework and applicable rates are revised.

The Old Regime (Income Tax Act, 1961 - Section 206C(1G))

Under the Act of 1961, the TCS provisions, particularly after the amendments leading up to 2025, were as follows:

The New Code (Income Tax Act, 2025 - Section 394)

Effective from April 1, 2026 (Tax Year 2026-27), the TCS provisions are consolidated and updated. The most significant change is the rationalization of rates for specific purposes to ease the burden on remitters.

Key Structural Changes:

• Consolidation of Law: All TCS provisions previously scattered in sub-sections of Section 206C of the 1961 Act are now systematically organized under Section 394 of the Income Tax Act, 2025. This aims to simplify the legal text and improve ease of reference.
• Unified Timeline: The new code introduces the concept of a single "Tax Year." For instance, the period from April 1, 2026, to March 31, 2027, is simply "Tax Year 2026-27," eliminating the confusing duality of "Previous Year" and "Assessment Year."

3. Claiming Refunds & ITR Adjustments

The procedure for adjusting the TCS collected against your final tax liability remains unchanged under the new Direct Tax Code. This process ensures that TCS acts as an advance tax payment rather than an additional cost.

Step-by-Step Adjustment Process:

1. Collection by Bank: When you initiate a foreign remittance exceeding the specified threshold, your bank will collect the applicable TCS amount from you.
2. Deposit with Government & Form 26AS: The bank deposits this TCS with the government on your behalf. This transaction is then reflected against your PAN in your Form 26AS, which is a consolidated annual tax statement.
3. TCS Certificate (Form 27D): The collecting bank is required to provide you with a Form 27D certificate, which serves as proof of the tax collected.
4. ITR Filing: While filing your Income Tax Return, the TCS amount from Form 26AS will be pre-filled or must be declared. This amount is then credited against your total calculated tax liability for the year.
5. Final Tax Calculation:
   • If your Total Tax Liability > TCS Collected, you will need to pay the remaining balance as self-assessment tax.
   • If your Total Tax Liability < TCS Collected, the excess amount will be issued to you as a tax refund.
   • If you have No Taxable Income, the entire TCS amount collected can be claimed as a refund.

For salaried employees, the introduction of Form 12BAA allows for the reporting of TCS payments to the employer, who can then adjust this against the monthly Tax Deducted at Source (TDS) on salary. This provides relief from liquidity issues by avoiding the long wait for an annual refund.

4. Banking & Documentation Requirements

To ensure compliance and a smooth remittance process, maintaining proper documentation is essential. Banks are obligated to collect TCS and require specific documents and declarations to determine the correct tax rate.

• PAN is Mandatory: Furnishing your Permanent Account Number (PAN) is mandatory for LRS transactions. In the absence of a PAN, the TCS rate applied can be significantly higher.
• Purpose Declaration: You must provide a declaration to the bank specifying the purpose of the remittance. This is critical for the bank to apply the correct TCS rate (e.g., 2% for education vs. 20% for investment).
• Form A2 cum LRS Declaration: A mandatory declaration is required under FEMA regulations for all remittances under the LRS, confirming the purpose and compliance with the scheme's limits.
• Supporting Documents: For specific purposes, additional proof may be required:
  • Education: Admission letter from the foreign educational institution, estimate of tuition fees and living costs. For remittances funded by a loan, a sanction letter from the financial institution is necessary to claim the NIL TCS rate.
  • Medical Treatment: A letter from the overseas hospital or doctor detailing the condition and estimated cost of treatment.

It is crucial to ensure that the cumulative LRS amount for the financial year is tracked across all your banking relationships, as the threshold of ₹10 lakh is applied on an aggregate basis against your PAN.

5. Advisory Conclusion

The transition to the Income Tax Act, 2025, represents a positive step towards simplifying the tax compliance framework for foreign remittances. The reduction in TCS rates for education and medical expenses from 5% to 2% provides significant relief to individuals and families, reducing the upfront financial burden and improving cash flow.

Our team advises all individuals planning foreign remittances under LRS to:

• Proactively Plan Remittances: Where possible, plan your transfers to manage the ₹10 lakh threshold effectively. Splitting non-essential remittances across financial years can help in avoiding the TCS levy altogether.
• Maintain Meticulous Records: Keep all documentation related to the purpose of remittance, bank statements, and TCS certificates (Form 27D) organized. This is vital for accurately filing your income tax return and claiming credit.
• Verify Form 26AS: Regularly check your Form 26AS on the income tax portal to ensure that the TCS deducted by the bank has been correctly credited against your PAN. Any discrepancy should be immediately raised with the remitting bank.
• Utilize Form 12BAA: Salaried individuals should leverage Form 12BAA to get immediate credit for TCS against their salary TDS, thereby optimizing their in-hand income throughout the year.

While the legal sections may change, the underlying principle of TCS as an adjustable advance tax remains. Staying informed about these updated rates and procedural nuances is key to ensuring full compliance and efficient tax management in the new regime.

💡 Remittance Tip: Planning to send money abroad? Check the latest TCS rates under the 2025 rules.