Explained: TCS on your child's overseas education and mitigating strategies

• If the remittance for foreign education exceeds ₹7 lakh and is funded through a loan, it will attract a TCS rate of 0.5%.
• If remittance is from one’s own funds, TCS shall apply at the rate of 5% on remittance above ₹7 lakh.
• The TCS paid is adjusted against your total tax liability when you file your return of income.

If you're currently in the midst of securing funds for your children's international higher education, you can rest easy knowing that the upcoming higher 20% tax collected at source (TCS) regulation, scheduled to come into effect on October 1, 2023, won't be a cause for concern.

The finance ministry has offered a reassuring guarantee that this elevated TCS rate will not be applicable to expenditures associated with overseas education and medical necessities. Your children's educational expenses abroad will remain unaffected by this tax change.

Having said that, let us take a look at how any remittance made for the purpose of your kid's education will attract TCS. There are two broad categories in this – self-funded and loan-funded education.

What constitutes education remittance?

“Any remittance for the purpose of education be it for accommodation, travel, food etc is treated at par as remittances for the purpose of education,” says Divakar Vijayasarathy, CEO and Founder, DVS Advisors, a tax-centric professional services firm.

Remittance for the purpose of education shall include, remittance for purchase of tickets of the person undertaking study overseas for commuting between India and the overseas destination, the tuition and other fees to be paid to the educational institute; and other day to day expenses required for undertaking such study.

When the education is funded through loan

Remittances below ₹7 lakh intended for educational expenses do not incur any TCS. In other words, there is no TCS for such transactions.

“If the remittance for foreign education exceeds ₹7 lakh and is funded through a loan obtained from an approved financial institution, it will attract a TCS rate of 0.5%. This means that 0.5% of the amount exceeding ₹7 lakh will be collected as TCS,” says Vertika Kedia, co-founder, Tax2Win, an income tax portal.

For example, if you are remitting ₹10 lakh abroad for foreign education and the remittance is funded through a loan obtained from an approved financial institution, you will be required to pay TCS of ₹1,500 (0.5% of ₹3 lakh).

When education is self-funded

“If remittance is from one’s own funds, TCS shall apply at the rate of 5% on remittance over and above ₹7 lakh. Refund of TCS can be obtained only upon filing return of income for the relevant year,” says Vijayasarathy.

If you are remitting ₹10 lakh abroad from your own funds, you will be required to pay TCS of ₹15,000 (5% of ₹3 lakh). You can only get a refund of this ₹15,000 by filing your return of income for the relevant year.

It is important to note that TCS paid in both the above cases is not an additional tax. It is simply a way of collecting tax at the source. The TCS paid is adjusted against your total tax liability when you file your return of income. If you have already paid more tax than you owe, you will be eligible for a refund.

How to reduce the impact of TCS

“If both parents are contributing to the education expenses, they can each utilise the ₹7 lakh threshold limit. This effectively allows a higher total amount to be remitted without incurring TCS,” says Kedia.

One can also involve grandparents for additional remittances: Involving grandparents or other family members in funding the education can further increase the exemption limit. Each family member can utilise their own ₹7 lakh exemption.

As we have seen, funding higher education overseas through an education loan reduces the impact of TCS. Consider financing your education through an education loan. This will allow you to benefit from the lower TCS rate of 0.5% specifically designed for education loans. Additionally, you can avail benefit under section 80E.

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