Thinking of travel or education abroad? Know income tax rules for foreign exchange transfers

 







As the world limps towards normalcy and more countries open their borders for travel, there are some rules pertaining to foreign exchange that one must keep in mind.

Cash transactions for buying US dollars or other currencies have certain limits which must be adhered unless you want to be on speed dial of the Income-Tax Department.

What are the rules for foreign exchange transactions?

Under the Section 285BA of Income Tax Act, 1961, designated companies, organisations, currency changers and banks are mandated to notify set financial activities annually in Form 61A. Any transaction involving buying the foreign currency of Rs 10 lakh or higher from money changers or banks or additional approved bodies under foreign exchange regulations need to be declared.

Other transactions that need to be notified include foreign exchange card, expenses incurred in foreign currency through the credit card or debit card or even the traveller’s cheque or lastly any other instruments, says Amit Gupta, MD, SAG Infotech.

The I-T department monitors such transactions in order to check whether high-value transactions undertaken by taxpayers are in sync with what is being declared in the Income Tax Return (ITR).

“The detailed monetary activities described by the various organisations, institutions are reflected in the taxpayer’s Form 26AS. Within that taxpayer can guarantee that the income reported to before-mentioned related activities is properly submitted to tax and revealed in their income tax return,” adds Gupta.

What to do in case you notice from I-T department for such transactions?

The taxpayer should submit a detailed explanation of the discrepancy pointed out by the tax authorities along with all necessary documents. The submission should involve an explanation of the sources of income tax paid.

Income tax on foreign exchange transactions

According to Section 206C (1G) of the Income-tax Act, 1961, foreign exchange transactions beyond the permissible limit will be subject to income tax. This limit is changed from time to time. As per existing rules effective October 1, 2020, tax is paid on any amount exceeding exempted limit of Rs 7 lakh in a financial year on a tax collected as source (TCS) basis. This TCS on amounts over the threshold of Rs 7 lakh is 5% and for educational loans, it is 0.5%. The TCS applicable is 10% if PAN number of the individual is not available.

However, for payments to travel and tour operators, TCS would be applicable on the entire amount paid as the exemption limit of Rs 7 lakh is not applicable in the case, according to Taxguru.in.

It is to be noted that the Reserve Bank of India (RBI) has capped the limit of foreign remittance of funds at $250,000 in a financial year under the Liberalised Remittance Scheme (LRS). It is applicable only for individuals and not for corporates, LLPs,

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