TCS (Tax Collected at Source) on foreign remittances is one of the most confusing tax topics for Indian businesses receiving international payments. This guide clarifies exactly when TCS applies, when it doesn't, and what it means for your cross-border transactions.
The Two Directions: Inward vs Outward Remittance
Inward remittance: Foreign client pays you (money comes INTO India). This is what most Indian service exporters deal with when receiving from US/UK/EU clients.
Outward remittance: You send money OUT of India (paying a foreign vendor, sending money abroad under LRS).
TCS under Section 206C(1G) applies to OUTWARD remittances, not inward service receipts. If you're an Indian service exporter receiving international payments: TCS under this section does NOT directly apply to you as the recipient.
TCS on Outward Remittances (LRS): The Rules
Section 206C(1G) was introduced in Budget 2020 and significantly amended in Budget 2023. Here's the current framework:
For LRS Transactions (Liberalised Remittance Scheme)
When Indian residents send money abroad under LRS, the Authorised Dealer bank collects TCS:
| Transaction Type | TCS Rate |
|---|---|
| Education remittance (via loan) | 0.5% above ₹7 lakh threshold |
| Education remittance (own funds) | 5% above ₹7 lakh threshold |
| Medical treatment abroad | 5% above ₹7 lakh threshold |
| All other LRS remittances | 20% above ₹7 lakh threshold |
The ₹7 lakh threshold: TCS applies only on the amount ABOVE ₹7 lakh per financial year across all LRS remittances. First ₹7 lakh is TCS-free.
Who pays TCS: The remitter (person sending money out). The AD bank collects it.
TCS is not a final tax: It's credited to your account with the IT department and offset against your tax liability when you file ITR. No net tax burden if you're otherwise compliant.
When Indian Businesses Send Money to Foreign Vendors
If your Indian company pays foreign software companies, freelancers, or service providers:
Section 195 (TDS on payments to non-residents) is more relevant than TCS. Section 195 requires the payer (you) to deduct TDS on the payment before remitting.
LRS TCS: LRS is designed for individuals, not companies. Indian companies making business payments to foreign vendors don't use LRS — they use normal outward remittance under current account regulations. TCS under Section 206C(1G) doesn't apply to regular business vendor payments.
When You Receive International Payments as an Indian Business
Inward service receipts (your Indian business receiving from foreign clients):
- No TCS by you or by your client
- No TDS by you (you're the recipient)
- Your foreign client may withhold their local tax (which you claim as a credit in ITR)
- You receive through an authorised channel (Playto Pay VBA, bank SWIFT)
- FIRA per transaction
- Declare as professional/business income in ITR TCS does not apply to you receiving service payment income from foreign clients.
Practical Scenarios: TCS Applies or Not?
| Scenario | TCS Applies? |
|---|---|
| Indian freelancer receives $5,000 from US client | No |
| Indian company receives £10,000 from UK client | No |
| Indian individual sends $15,000 abroad under LRS (above ₹7L) | Yes — 20% on excess |
| Indian company pays $50,000 to US software vendor | No TCS (Section 195 TDS may apply) |
| Indian student's parents remit ₹10 lakh for overseas education (own funds) | Yes — 5% on ₹3 lakh excess |
FAQ
Does TCS apply when Indian businesses receive international payments? No. TCS under Section 206C(1G) applies to outward remittances under LRS. Receiving service income from foreign clients is an inward remittance — no TCS applies.
What is the TCS rate on outward remittances under LRS? 20% on the amount above ₹7 lakh per financial year for most LRS transactions (other than education via loan at 0.5%, or education/medical at 5%).
Is TCS a final tax? No. TCS collected is credited to your PAN and offset against your tax liability when you file ITR. You get a credit, not a permanent deduction.
What tax applies when I pay a foreign freelancer from my Indian company? Section 195 TDS may apply. This is different from TCS. Consult your CA before large outward vendor payments.