4 Apr 2023

Do TCS deductions reduce advance tax liability?

From 1-Jul-2023, 20% of the LRS amount will be deducted as Tax Collected at Source (TCS) by the bank, and only the remaining 80% will be transferred to the brokerage account. That means, if an investor sends ₹5,00,000 to their brokerage account, they will receive USD worth ₹4,00,000 only! The remaining ₹1,00,000 will be taken away as tax collected at source.

This is a big blow for Indian investors who invest outside India through the LRS scheme. Sure, this is not additional tax. Investors can claim this ₹1,00,000 as tax refund while filing tax return. But there is an opportunity cost as this ₹1,00,000 remains uninvested for up to 15 months (or sometimes even longer).

Can we adjust this TCS with advance tax?

I invest in a Vanguard ETF that is not traded in India. To make this investment, I send money out to a foreign brokerage account through the Liberalised Remittance Scheme (LRS). I was thinking about this new rule, and wondering if there was a way to reduce its impact on me.

I am liable to pay advance tax every quarter as I have regular rent income. I was wondering if the TCS collected at the time of LRS transfers can offset the advance tax I need to pay. Here is an illustration:

  • I send ₹5,00,000 to my brokerage account on 12-Aug-2023. The bank takes out ₹1,00,000 from my remittance and deposits it as income tax into my account.
  • On 15-Sep-2023, I have an advance tax liability of, let’s say, ₹54,000 from other incomes such as rent, capital gains, etc.
  • The question I had was: Can I skip paying the advance tax because the TCS deduction was more than my advance tax liability?

The answer seems to be Yes!

Section 209 of the Income Tax Act, called “Computation of advance tax”, says this:

(1) The amount of advance tax payable by an assessee in the financial year shall […] be computed as follows:
  (d) the income-tax calculated […] shall […] be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income […]; and the amount of income-tax as so reduced shall be the advance tax payable

It is not the easiest text to follow, but it seems to say that advance tax liability is computed as Advance Tax Payable = Total Tax Payable – (All TCS payments + All TDS payments).

I can skip or reduce my TDS payments based on how much TCS had been deducted in the quarter. That means I’ll have a little bit more capital left with me, which I can invest in India.

The new rule mandating 20% TCS on LRS payments is a big blow for many people. Having rent income has kind-of made it a little bit less severe a hassle for me.

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