How does TCS on Education Loans make Abroad Education Loans more Rewarding?

Tax Collection at Source or TCS on education loans makes education loans more rewarding for study-abroad aspirants. No investment can get you a higher return than the one on your education. A smart move for education loans can save you around 4.5% more money than you need to spend for education abroad. Adding to the purely economic reasons to go for an abroad education loan are the TCS rules introduced by the Government of India in 2020.

Understanding the benefits of education loans over self-funding after the new TCS rules is crucial for study-abroad aspirants. Also, it is essential to learn about the tax amendment before applying for a loan since the new rule can also be corrected further. Keep reading for an in-depth understanding of TCS on foreign remittance for education loan and how the new TCS rules favor education loans over self-funding for overseas education.

What is TCS n Education Loan?

TCS is the additional amount the seller of specified goods gets as tax from the customer to be remitted to the government's account. 

• Union Budget 2020 has brought a new rule according to which a 5% TCS applies to the forex remittances of INR 7 Lakh or more in a financial year.
• The new TCS rule comes under the Liberalized Remittance Scheme (LRS).
• This new rule on foreign exchange transactions has been in place since 01 October 2020.

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What is the LRS (Liberalized Remittance Scheme)?

To start with some basics, the LRS, under the RBI guidelines, allows an individual to remit up to USD 2,50,000 per financial year (April – March) for education-related expenses as well as investing in the foreign stock markets. 

From October 01, 2020 onwards, this new limit is INR 7 Lakh for foreign exchange remittances. This scheme does not apply to corporates, non-resident Indians (NRI), firms, and trusts, among others. In short, it means that if you want to fund your abroad education (which requires certainly more than INR 7 Lakh), the tax you pay is 5% of the amount minus INR 7 Lakh.

What are the New Amendments to the TCS Rules?

The following are the major takeaways from the new education loan TCS rules valuable for an education abroad aspirant:

• A tax of 5% is applicable on an amount more than INR 7 Lakh in a financial year (not on the total amount).
• If the amount is remitted for abroad education purposes through an education loan from any authorized financial institution, the TCS on foreign remittance for education shall be 0.5% on the amount more than INR INR 7 Lakh.
• The TCS is collected at the time of receipt of the amount or while debiting the amount payable, whichever is earlier.
• The TCS rates are increased by an applicable surcharge and Health & Education Cess if the remitter is a non-resident as per the Income-Tax Act, 1961.
• If the remitter does not furnish his/her PAN details, the TCS will be 10% instead of 5% GST will not apply to the TCS amount.
• The TCS is reflected as a tax credit in Form 26AS. Therefore, the amount of TCS can be claimed as a credit against tax payable while filing the ITR. If the TCS is higher than your payable tax, you will get a refund.

How is the TCS Calculated?

The tax is collected only on the remitted amount above INR 7 Lakh. For example, if someone remits INR 10 Lakh in a year, 5% TCS will be calculated on INR 3 Lakh i.e. INR 15,000 will be deducted as TCS.

Watch how to get income tax exemptions on education loan under Section 80E

What are the Benefits of Taking an Education Loan Over Self-Funding?

Now comes why education loans for abroad studies are the best choice over self-funding under the TCS rules:

• If you are financing your study abroad without a loan, you need to remit a tax of 5% to the bank. According to the TCS rule, authorized dealers such as banks and remittance companies collect the 5% TCS once the foreign remittance made by a person crosses INR 7 Lakh in a financial year.
• At the same time, you need to pay for overseas education loans TCS is only 0.5%, which is a difference of 4.5%.

Given that education abroad is quite expensive, TCS on foreign remittance for education loan can be a considerable savings in the amount you need to spend for education abroad. Therefore, students taking an education loan to finance their studies abroad have a notable savings on the tax amount.

How do the TCS Amendments help in Education Loans?

Here’s how the new TCS on foreign remittance for education loan rules makes abroad education loans a smart option for students. Only 0.5% TCS applies to the transfer amount of more than INR 7 Lakh if the educational expense is financed through an education loan. However, if the educational funds are not arranged through an education loan, a 5% tax on the amount transferred above INR 7 Lakh will be deducted.

It means that if a student takes financial assistance from anyone other than authorized financial lenders like public sector banks, private banks, and NBFCs, the tax amount will be added to the financial burden.

Let us understand it better with an example. Ashok, who is sending INR 12 Lakh to his son studying in America, has to pay a TCS of INR 25,000 (5% of 12 Lakh -7 Lakh) if the funds are not arranged through an education loan. If Ashok's son has taken an education loan for his studies abroad, the applicable TCS will be INR 2,500 (0.5% of 12 Lakh-7 Lakh).

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How can GyanDhan help?

Since abroad education loans are the best choice to fund abroad studies, here’s where GyanDhan comes to your help. Students can get in touch with us and our education loan counselor will suggest the best education loan options depending upon the overall profile. GyanDhan is an education financing marketplace and has partnered with government banks like SBI, and UBI, private banks like Axis and ICICI, and several NBFCs such as HDFC Credila, Avanse, and more. The entire loan process is online and students can get everything done from the comfort of their home. To start your education loan journey from the comfort of your home, check your loan eligibility now.

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