TCS Rules, Calculations and LRS Decision Cases - Article

Introduction

The Liberalised Remittance Scheme (LRS) allows resident individuals to remit money outside India for permitted current-account and capital-account transactions.

Under RBI rules, a resident individual, including a minor, can remit up to USD 250,000 in a financial year from April to March for permissible transactions. The limit applies to the aggregate of eligible remittances during the year.

For CAIIB, LRS becomes more important when it is combined with Tax Collected at Source (TCS). A numerical question may require the learner to identify:

• whether the transaction falls under LRS;

• whether the ₹10 lakh TCS threshold has been crossed;

• whether TCS applies only to the excess or to the entire payment;

• which TCS rate applies;

• whether an education-loan exemption is available; and

• whether an overseas tour package follows a different rule.

A major exam risk is using an old TCS rate. From 1 April 2026, the Income-tax Act, 2025 applies to current TCS transactions, and Section 394 contains the applicable TCS framework.

Learning Objectives

After studying this topic, you should be able to:

• identify whether a remittance falls under LRS;

• distinguish the USD 250,000 LRS limit from the ₹10 lakh TCS threshold;

• select the correct TCS rate based on purpose;

• identify remittances exempt from TCS;

• determine the portion of a remittance on which TCS applies;

• handle multiple remittances during the same year; and

• distinguish LRS remittances from overseas tour programme packages.

1. Start with the LRS Framework

LRS is available to resident individuals, including minors. It is not available as an LRS facility to corporates, partnership firms, HUFs or trusts.

The overall LRS limit is:

USD 250,000 per resident individual per financial year.

Permitted purposes include, among others:

• private visits abroad;

• gifts and donations;

• employment abroad;

• emigration;

• maintenance of close relatives abroad;

• business travel and specialised training;

• medical treatment abroad;

• studies abroad; and

• permissible capital-account transactions.

PAN is required for LRS transactions through authorised persons under RBI's LRS framework.

LRS Limit and TCS Threshold Are Not the Same

This distinction is extremely important.

The current Income-tax law applies TCS to LRS remittances where the amount or aggregate exceeds ₹10 lakh.

2. Current TCS Rates on LRS

For transactions governed by the Income-tax Act, 2025 from 1 April 2026, Section 394 provides the following treatment.

The 2% rate for education and medical treatment replaced the earlier 5% rate with effect from 1 April 2026. The overseas tour programme package rule was also changed to a 2% rate from that date.

Education Financed Through Loan

Where the amount remitted for education comes from a loan obtained from a qualifying financial institution for pursuing education, the authorised dealer does not collect TCS on that remittance under the current provision.

This is different from an education remittance funded from:

• savings;

• deposits;

• sale proceeds;

• parent's own funds; or

• another source not satisfying the specified education-loan condition.

Such an education remittance follows the normal education-purpose TCS rule.

3. Which Amount Is Subject to TCS?

For ordinary LRS remittances, the ₹10 lakh threshold is an annual aggregate threshold for the remitter.

The first ₹10 lakh of qualifying LRS remittances does not attract TCS under this threshold mechanism. Once cumulative remittances cross ₹10 lakh, the applicable rate is applied to the portion falling above the threshold. Section 394 specifically refers to an amount or aggregate of amounts exceeding ₹10 lakh.

Historically, CBDT has also clarified that the LRS threshold is a combined threshold across purposes, rather than a separate threshold for education, medical treatment and other purposes. It is attached to the remitter, not separately to each authorised dealer.

Therefore, while solving a case, do not give a fresh ₹10 lakh threshold merely because:

• the purpose changes;

• another bank is used; or

• several remittances are made.

Formula

TCS = Applicable TCS Rate × Portion of LRS Remittance Above ₹10 Lakh

This formula determines the tax to be collected after the annual LRS threshold is crossed.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

4. Correct Method for Solving LRS-TCS Numericals

Use the following sequence.

Step 1: Identify the Person

Confirm that the remitter is a resident individual and that the transaction is being undertaken under LRS.

Step 2: Identify the Purpose

Classify the remittance as:

• education;

• medical treatment;

• other LRS purpose; or

• an overseas tour programme package.

Purpose determines the applicable TCS treatment.

Step 3: Check for Education-Loan Exemption

If the purpose is education, check the source of funds.

If it is financed through a qualifying education loan from a financial institution satisfying the statutory condition, the authorised dealer does not collect TCS.

Step 4: Find Earlier LRS Remittances

Add the LRS remittances already made by the individual during the year.

Do not look only at transactions made through the present bank.

Step 5: Determine Whether ₹10 Lakh Is Crossed

If the aggregate has not crossed ₹10 lakh, identify whether the present transaction causes the threshold to be crossed.

Only the relevant amount above the threshold is taken for ordinary LRS TCS calculation.

Step 6: Apply the Rate of the Present Remittance

Apply:

• 2% for education or medical treatment;

• 20% for other LRS purposes; or

• the applicable exemption for qualifying education-loan remittance.

Step 7: Check Whether It Is Actually an Overseas Tour Package

An overseas tour programme package follows a separate TCS treatment.

Do not mechanically apply the ordinary LRS threshold rule to it.

5. Multiple Remittances During the Year

CAIIB questions may give several transactions instead of one remittance.

The correct method is to arrange them in chronological order.

Suppose a customer first makes ordinary LRS remittances below ₹10 lakh and subsequently makes another remittance that takes the annual aggregate beyond ₹10 lakh.

The learner should:

1. calculate the cumulative remittance before the current transaction;

2. identify how much of the ₹10 lakh threshold remains;

3. allocate the unused threshold against the current transaction; and

4. apply TCS to the remaining portion at the rate applicable to the purpose of that transaction.

If a later remittance is for another purpose, apply the rate applicable to that later purpose.

6. Different Banks Do Not Create Separate Thresholds

A customer may remit foreign exchange through more than one authorised dealer.

This does not create a separate annual LRS-TCS threshold for each bank.

CBDT has clarified that the threshold relates to the remitter rather than the authorised dealer. The earlier guidance also permitted authorised dealers to obtain details of earlier remittances from the remitter for applying TCS correctly.

Therefore, a numerical question may deliberately state that:

• one remittance was made through Bank A; and

• a later remittance is being made through Bank B.

The learner must consider the aggregate annual remittances.

7. Education and Medical Remittances

Education and medical purposes receive concessional TCS treatment compared with other ordinary LRS purposes.

From 1 April 2026, the applicable rate is 2% on the amount above ₹10 lakh, subject to the special education-loan exemption.

CBDT's guidance on the scope of education remittances includes items directly connected with overseas education, such as tuition-related expenditure and certain travel and living expenses associated with study. Medical-purpose guidance similarly covers relevant medical and related expenses falling under the appropriate remittance purpose.

For examination purposes, the purpose classification matters. A payment merely connected with travel should not automatically be treated as an “other purpose” if the facts clearly establish that it forms part of eligible education or medical expenditure.

8. Other LRS Purposes

LRS remittances for purposes other than education or medical treatment attract 20% TCS on the portion exceeding ₹10 lakh under the current rule.

Such cases may include permissible remittances for:

• gifts;

• investments abroad;

• purchase of permitted overseas assets;

• private travel expenditure covered by LRS; and

• other permitted LRS transactions that do not qualify for the education or medical concession.

The high 20% rate makes correct classification important in numerical questions.

9. Overseas Tour Programme Package

An overseas tour programme package is treated separately from an ordinary LRS remittance.

Under Section 394 of the Income-tax Act, 2025, the seller of an overseas tour programme package collects TCS at 2% under the current rule effective from 1 April 2026.

Unlike ordinary LRS remittances, the current 2% overseas-tour provision does not provide the ₹10 lakh exemption before TCS begins.

Where tax has already been collected by the seller in respect of the overseas tour programme package, the authorised dealer does not collect TCS again on that amount.

CBDT has clarified that purchase of only an international air ticket or only hotel accommodation, by itself, is not an overseas tour programme package. The package should combine the required travel-related elements rather than merely consist of one standalone service.

Ordinary LRS vs Overseas Tour Package

This distinction is a high-value case-study area.

10. PAN and Higher TCS Rate

The Income-tax Act, 2025 requires a person paying an amount on which tax is collectible to furnish a valid PAN to the person responsible for collection.

If PAN is not furnished, TCS is collected at the higher of:

• twice the applicable statutory rate; or

• 5%,

subject to a maximum TCS rate of 20%.

Therefore:

• a normal 2% rate can become higher where PAN requirements are not met; while

• an ordinary other-purpose LRS remittance already attracting 20% does not rise beyond the statutory 20% cap.

For LRS itself, RBI also requires the resident individual to provide PAN for LRS transactions.

11. Practical Banking Application

Consider how an authorised dealer handles an outward-remittance request.

The bank should first identify:

• resident status and LRS eligibility;

• purpose of remittance;

• available LRS limit;

• aggregate remittances already made;

• source of funds where education is involved;

• whether the transaction is an overseas tour package;

• PAN details; and

• the applicable TCS treatment.

TCS does not replace normal FEMA and LRS checks.

A transaction may be within the TCS rules but still fail FEMA or LRS requirements. Similarly, a transaction may be fully permitted under LRS but attract TCS because the statutory threshold has been crossed.

12. LRS Decision Cases

Case 1: Aggregate Below ₹10 Lakh

If the customer's aggregate ordinary LRS remittances remain within ₹10 lakh, no TCS arises under the ordinary LRS threshold rule.

Do not apply 2% or 20% merely because a remittance has been made.

Case 2: Present Remittance Crosses ₹10 Lakh

Where earlier remittances have used part of the threshold and the current remittance pushes the annual aggregate above ₹10 lakh:

• use the remaining threshold first;

• identify the portion falling above ₹10 lakh; and

• apply the rate based on the purpose of the current remittance.

Case 3: Threshold Already Exhausted

If the ₹10 lakh threshold has already been exhausted by earlier ordinary LRS remittances, a later taxable LRS remittance is subject to TCS from the beginning of that later remittance at its applicable rate.

Case 4: Education After Other Remittances

If earlier remittances have already crossed the threshold and a later remittance is for education from own funds, the later education remittance follows the current 2% education rate, rather than the 20% rate applicable to the earlier “other purpose” transaction.

Case 5: Education Through Qualifying Loan

If the statutory education-loan condition is satisfied, do not calculate ordinary LRS TCS merely because the ₹10 lakh threshold has otherwise been crossed. The authorised dealer does not collect TCS on that qualifying education-loan remittance.

Case 6: Overseas Tour Programme Package

If the payment is for a qualifying overseas tour programme package, apply the separate tour-package rule instead of treating it as an ordinary “other purpose” LRS remittance.

This distinction can completely change the TCS result.

13. CAIIB Exam Focus

Pay particular attention to the following areas:

Threshold versus Limit

Do not confuse:

• ₹10 lakh TCS threshold, and

• USD 250,000 LRS limit.

Aggregate, Not Individual Transaction

The TCS threshold is based on annual aggregate LRS remittances, not merely the amount of the current transaction.

Combined Threshold

Do not separately provide ₹10 lakh thresholds for:

• education;

• medical treatment; and

• other LRS purposes.

Purpose Determines Rate

Once the taxable portion is identified, apply the rate appropriate to the relevant remittance.

Education Loan Is a Special Case

“Education” and “education financed by qualifying loan” are not identical for TCS purposes.

Tour Package Is Separate

Do not apply the ordinary 20% other-purpose LRS rule automatically to an overseas tour programme package.

Check the Date

A question based on an earlier tax period may require the historical rate applicable at that time.

For a current-position question from 1 April 2026 onward, use the Income-tax Act, 2025 framework and current rates.

14. Common Exam Traps

Trap 1: Applying TCS to the Entire Ordinary LRS Remittance

Where the ₹10 lakh ordinary LRS threshold is available, TCS is not automatically calculated on the entire annual remittance.

First isolate the amount exceeding the threshold.

Trap 2: Giving ₹10 Lakh Exemption Separately for Every Purpose

The threshold is not independently refreshed when the customer shifts from education to medical treatment or another LRS purpose.

Trap 3: Giving a New Threshold for Another Bank

Changing the authorised dealer does not reset the remitter's annual threshold.

Trap 4: Applying 20% to Every Foreign Remittance

The 20% rate applies to ordinary LRS purposes other than education and medical treatment. It is not the universal rate for every outward remittance.

Trap 5: Applying 2% to All Education Cases

A qualifying education-loan remittance receives the statutory no-TCS treatment by the authorised dealer rather than simply the normal 2% education rate.

Trap 6: Using Pre-April 2026 Rates

The current education and medical rate is 2%, not the earlier 5%. The current overseas tour programme package rate is also 2% from 1 April 2026.

Trap 7: Treating TCS as Final Income Tax

TCS is tax collected at source. It is not, merely because it has been collected, a separate final tax on the remittance. Tax collected and deposited is available as tax credit in accordance with income-tax provisions.

Trap 8: Ignoring PAN

Failure to furnish valid PAN can trigger the higher TCS mechanism, subject to the statutory cap.

15. Memory Technique

Remember the sequence:

P–A–T–R

P – Purpose Identify education, medical, other purpose or tour package.

A – Aggregate Check cumulative LRS remittances.

T – Threshold Apply the ₹10 lakh ordinary LRS threshold where relevant.

R – Rate Apply the correct current rate to the amount on which TCS is required.

For current ordinary LRS rates, remember:

Education/Medical = 2; Other = 20

For a qualifying education loan, remember:

Loan for Education → Check Exemption Before Rate

This sequence prevents most LRS-TCS numerical errors.