LRS TCS Under Direct Tax Code 2025: A Complete Compliance Guide

Key Takeaways

• Shift in Law: The Direct Tax Code, 2025, replaces the Income Tax Act, 1961, sunsetting Section 206C(1G) and introducing a new consolidated framework for Tax Collected at Source (TCS) on foreign remittances.
• Revised Thresholds and Rates: The threshold for levying TCS on most remittances under the Liberalised Remittance Scheme (LRS) is set at ₹10 lakh per financial year. Remittances for general purposes, like investments, above this limit will attract a 20% TCS.
• Relief for Education & Medical: A significant change is the reduced TCS rate for educational and medical expenses. For self-funded remittances above the ₹10 lakh threshold, a lower rate of 5% is applicable. Furthermore, remittances for education funded by a loan from a financial institution are exempt from TCS entirely.
• Credit and Refund Mechanism: TCS is not an additional tax but an advance tax collection. The amount collected can be claimed as a credit against your final tax liability or refunded when filing your Income Tax Return (ITR).

PART 1: EXECUTIVE SUMMARY

This guide provides a professional compliance overview of the transition from the repealed Income Tax Act, 1961, to the newly enacted Direct Tax Code, 2025 (DTC). Specifically, our analysis focuses on the changes to Tax Collected at Source (TCS) on foreign remittances under the Liberalised Remittance Scheme (LRS), formerly governed by Section 206C(1G). This transition aims to simplify the tax structure, enhance transparency, and recalibrate the compliance burden on individuals remitting funds abroad.

• The Old Law (1961): Under Section 206C(1G) of the Income Tax Act, 1961, TCS was applicable on foreign remittances exceeding ₹7 lakh in a financial year. The rates varied, with a significant 20% rate applied to most remittances (other than for education and medical purposes) above this threshold, causing substantial upfront cash flow implications for remitters.

• The New Law (2025): The Direct Tax Code, 2025, while maintaining the policy objective of tracking large foreign outflows, has rationalized the TCS framework. The new provisions raise the base exemption threshold for all LRS remittances to ₹10 lakh. For remittances exceeding this limit, the 20% TCS rate is retained for investments and other general purposes. However, for specified purposes like education and medical treatment, the rate is a much-reduced 5% on the amount exceeding ₹10 lakh. Remittances for education funded through loans from specified financial institutions are completely exempt from TCS.

• Who is Impacted: This change directly impacts all resident individuals who send money abroad under the LRS. This includes parents paying for their children's overseas education, individuals making foreign investments, those seeking medical treatment abroad, and individuals sending gifts or financial support to relatives overseas. The revised structure provides significant relief to those making smaller remittances (below ₹10 lakh) and those remitting for educational and medical needs, while continuing to monitor high-value discretionary outflows.

PART 2: DETAILED TAX ANALYSIS

1. Background on Foreign Remittances

The Liberalised Remittance Scheme (LRS), governed by the Reserve Bank of India (RBI), permits resident individuals to remit up to USD 250,000 per financial year for a range of current and capital account transactions. These include overseas education, medical treatment, purchase of property, foreign investments, and maintenance of close relatives.

To track high-value outflows and widen the tax base, the government introduced Tax Collected at Source (TCS) on these transactions through Section 206C(1G) of the Income Tax Act, 1961. This mechanism requires the authorized dealer (typically a bank) to collect a percentage of the remittance amount as an advance tax. It is critical to understand that TCS is not a final tax. It is a provisional collection that is credited to the remitter's PAN and can be adjusted against their total income tax liability during the annual Income Tax Return (ITR) filing. If the TCS collected exceeds the actual tax liability, the remitter is eligible for a refund.

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

The transition to the Direct Tax Code, 2025, brings material changes to the TCS framework for LRS transactions, moving away from the provisions of Section 206C(1G). Our team has analyzed the key differences below.

Key Implications of the Shift:

• Enhanced Liquidity: The higher threshold of ₹10 lakh provides immediate relief, allowing for greater remittance without any upfront tax collection, which improves cash flow for most individuals.
• Support for Education: The complete removal of TCS on education remittances funded by loans is a major benefit for students and their families, reducing the overall cost and complexity of financing overseas education.
• Continued Scrutiny: The retention of the 20% TCS rate for high-value discretionary spending (above ₹10 lakh) signals the government's continued focus on monitoring large capital outflows and ensuring tax compliance.

3. Claiming Refunds & ITR Adjustments

The process for claiming credit for TCS remains fundamentally similar under the Direct Tax Code, 2025. The core principle is that the TCS amount collected by the bank is reflected in the remitter's Form 26AS, which is a consolidated annual tax statement.

Step-by-Step Compliance Process:

1. Verify Form 26AS: Before filing your ITR, log in to the income tax portal and meticulously verify that the TCS amount collected by your authorized dealer (bank) is accurately reflected in your Form 26AS against your PAN.
2. Collect TCS Certificates (Form 27D): Your bank, as the tax collector, is obligated to provide you with a TCS certificate in Form 27D on a quarterly basis. This certificate is crucial documentary proof of the tax collected.
3. File Correct ITR Form: Based on your sources of income, select the appropriate ITR form.
4. Enter TCS Details in ITR: In the "Taxes Paid" schedule of the ITR form, accurately fill in the details of the TCS collected. The system will typically auto-populate this information from your Form 26AS, but it must be verified.
5. Adjustment and Refund: The ITR utility will automatically adjust the TCS amount against your total tax liability for the year. If the total tax paid (including TCS, TDS, and advance tax) is more than your tax liability, the excess amount will be processed as a refund and credited to your pre-validated bank account.

During the transition year, it is imperative to ensure that TCS collected under both the old Act and the new Code is properly accounted for in the ITR.

4. Banking & Documentation Requirements

Authorized dealers will play a pivotal role in implementing the new TCS provisions under the DTC 2025. Individuals planning to remit funds must ensure compliance with the following:

• PAN is Mandatory: Providing a Permanent Account Number (PAN) is mandatory for all LRS transactions. Failure to do so can attract a much higher rate of TCS.
• Purpose Code Declaration: You must accurately declare the purpose of the remittance to the bank. Incorrect classification can lead to the application of a higher TCS rate (e.g., declaring an education remittance as a gift could attract 20% TCS instead of 5% or 0%).
• Undertaking for Threshold: Banks may require you to provide an undertaking regarding other remittances made during the financial year through other authorized dealers to ensure the aggregate ₹10 lakh threshold is not breached without TCS being applied.
• Documentation for Lower Rates: For remittances for education or medical treatment, banks will require supporting documents.
  • Education: Admission letters, fee invoices from the foreign university, and for loan-based remittances, a sanction letter from the financial institution.
  • Medical: Estimates from the overseas hospital, prescriptions from doctors, etc.

5. Advisory Conclusion

The enactment of the Direct Tax Code, 2025, marks a significant reform in the taxation of foreign remittances. While the core mechanism of Tax Collected at Source on LRS transactions is retained, the changes are aimed at providing targeted relief and simplifying compliance. The increase in the general threshold to ₹10 lakh is a welcome move that will benefit a large number of individuals.

Our team advises all resident individuals engaging in foreign remittances to familiarize themselves with these new provisions. Proactive planning, accurate declaration of the purpose of remittance, and meticulous maintenance of documentation are essential to ensure compliance and avoid unnecessary financial burdens. The TCS collected is fully adjustable against your tax liability, and timely filing of your Income Tax Return is the key to ensuring a smooth credit or refund process. This new framework balances the need for fiscal monitoring with the facilitation of genuine foreign currency transactions for education, medical care, and global investments.

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