Budget 2026: TCS Rate Reduced to 2% – What Does It Mean for Taxpayers?
While presenting the Union Budget 2026, Finance Minister Nirmala Sitharaman announced a reduction in the rate of tax collected at source (TCS) from 5% (or 20%) to 2% for various purposes, including foreign education, medical expenses, and overseas tour programmes.
According to the Finance Minister, Liberalised Remittance Scheme (LRS) allows resident Indians to transfer up to $250,000 in a financial year. At the time of transfer, taxpayers have to pay TCS at the rate of 5%, which is an advance tax that can be adjusted at the time of filing the income tax return against the overall tax liability.
What is TCS and How Does It Work?
TCS is a tax that is collected by the seller of a product or service from the buyer at the time of sale. The seller then deposits this tax with the government. In the case of foreign remittances, TCS is collected by the bank or other financial institution that facilitates the transfer.
For example, if your total tax liability is ₹50,000 for a financial year and you have paid TCS to the tune of ₹45,000 during the same year, then you would be entitled to receive ₹5,000 towards tax refund. You can learn more about tax refunds and how to claim them.
Is a Flat Rate of 5% Applicable to All Categories of Remittances?
No, the tax rate varies by expense category. In the case of education, there is no TCS up to a limit of ₹10 lakh. When the remittance is more than ₹10 lakh, TCS of 5% kicks in. From the next financial year, this will be reduced to 2%.
However, when a foreign remittance is funded by an education loan, TCS does not apply.
For medical treatment, there is no TCS up to ₹10 lakh and 5% for the amount above ₹10 lakh. For overseas tour packages, TCS is levied at 5% (now reduced to 2%) on amounts up to ₹10 lakh and 20% on amounts above that.
How Will the Reduced TCS Rate Benefit Taxpayers?
When tax is adjusted while filing ITR, it will benefit taxpayers because travellers do not need to spend a higher amount upfront. When a large amount is involved (say ₹30 lakh), an extra 5% on ₹20 lakh can increase the cash outgo by ₹1 lakh. Now, when the rate is reduced to 2%, cash outgo would fall to ₹40,000.
According to CA Chirag Chauhan, founder of Mumbai-based CA Chauhan & Company, income tax department is supposed to return this money (collected as TCS) anyway, along with the interest on it. When this amount is tiny (2%), it could be adjusted against the overall tax liability at the year-end, but a higher amount (5% or 20%) is usually refunded along with 6% interest to the taxpayers in July or August (after the return is filed).
Impact on the Indian Economy
The reduction in TCS rate is expected to have a positive impact on the Indian economy. It will increase the disposable income of individuals, which can lead to higher consumption and investment. Additionally, it will also reduce the burden on the Indian economy and make it more competitive.
Conclusion
In conclusion, the reduction in TCS rate to 2% is a welcome move for taxpayers. It will reduce the burden of tax on individuals and increase their disposable income. However, it is important to note that the reduced TCS rate will only apply to remittances made after the new financial year. Therefore, individuals should plan their foreign remittances accordingly and take advantage of the reduced TCS rate.
