TCS on education loan makes getting a foreign degree more expensive

For talented students, the dream of getting a foreign degree has become a distant one as tax is to be collected at source (TCS) now if the amount of remittance exceeds Rs 7 lakh. While the TCS rate will be 0.5 per cent (0.375 per cent till March 31, 2021) if the amount is remitted from a financial institution, the rate will become 10 times or 5 per cent (3.75 per cent till March 31, 2021) if the amount remitted is from any other source.

“As the Finance Act of 2020 introduced Section 206C(1G) under the Income Tax Act, 1961 (hereinafter referred to as ‘The Act’) which imposes 0.5 per cent TCS on an amount exceeding Rs 7 lakh in case of any remittance made out of education loan from any financial institution in India as defined in section 80E for the purpose of pursuing any foreign education. Such TCS would be levied on the amount of remittance inclusive of GST,” said Dr. Suresh Surana, founder, RSM India.

“However, on certain foreign remittances (other than remittance made out of education loan from any financial institution) at the TCS rate will be 5 per cent, provided the amount of remittance exceeds Rs 7 lakh. Also, such rate would be enhanced to 10 per cent in case of absence of availability of PAN or Aadhar,” he added.

So, if a poor student is unable to source a loan from a financial institution and wants to take assistance from his/her relative(s), the amount of tax will be added to the financial burden if the amount exceeds Rs 7 lakh.

For example, in case the overall monthly expenditure comes out to be Rs 1 lakh to pursue a 2-year foreign degree, apart from sourcing Rs 24 lakh from a source other than a financial institution, a poor student has to manage Rs 1,20,000 more to pay tax to the government.

Even if an NGO gives financial assistance to a financially poor meritorious student to pursue higher study, the student will have to pay tax on the scholarship.

“The overall cost of pursuing foreign education shall increase for students due to the applicability of TCS. Further, in case of funding through their own or family sources (other than through financial institutions), the TCS rate is higher at 5 per cent,” said Dr. Surana.

“However, it is to be noted that the TCS collected and paid would be reflected in the Form 26AS of the remitter and can be adjusted against any tax liability of such remitter,” he added.

Apart from foreign education, the TCS rule will make foreign tour packages expensive as well.

“The foreign remittances on which such TCS would be imposed include any remittance of amount out of India under the Liberalised Remittance Scheme (‘LRS’) of the Reserve Bank of India (RBI) via an authorised dealer as well as purchase of an overseas buying package. In case of buyers of foreign tour packages, there is no minimum threshold prescribed and the rate of TCS applicable is 5 per cent. (10 per cent if no Aadhar / PAN provided),” said Dr. Surana.

“Thus, students remitting any payment abroad for foreign education out of an education loan as well as buyers of overseas tour packages needs to take into consideration the TCS that would be collected from such amount and accordingly gross up their remittances to include the TCS,” reminds Dr. Surana.