As we approach Budget 2026, it is time to look back on the past and thank the finance minister for presenting an excellent and people-oriented Budget 2025 on February 1, 2025. It provided significant reliefs to middle-class taxpayers. The middle class is now expanding its net and spending money on foreign exchange for foreign travel, education abroad for their children, purchasing movable and immovable assets abroad, and maintenance of relatives staying abroad.

In a move to strengthen fiscal oversight and streamline foreign exchange transactions, the Indian government introduced Tax Collected at Source (TCS) under the Indian Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on remittances made under the Liberalised Remittance Scheme (LRS), which route is available to resident Indians.

TCS, one of the mechanisms to check tax evasion

TCS is a mechanism under which an additional amount of tax is collected from buyers of certain goods or services, such as alcohol, timber, minerals, motor vehicles, and foreign remittances. The prominent ones are motor vehicles, foreign travel, foreign education, stocks of foreign companies, and immovable properties. The collected tax is then deposited with the government, and a TCS certificate is issued to the buyer, which can be claimed as a credit against the taxpayer’s tax liability in their income tax return. The provisions related to TCS are covered under section 206C of the Act. The rate of TCS generally ranges from 1% to 5% and is as high as 20% in the case of Liberalised Remittance Scheme (LRS).

Spending on foreign remittance has increased

There has been a significant rise in spending on foreign remittances in recent years, largely on foreign travel, education abroad, maintenance for relatives staying abroad, and the acquisition of movable and immovable property abroad. Indians have been drawing foreign exchange under LRS.

There have been many representations from taxpayers seeking to revamp the TCS provisions. The government has taken several steps to revamp the impact of TCS on foreign remittances. The TCS rate was reduced, and the TCS threshold was increased from ₹7 lakh to ₹10 Lakh for foreign travel. One of the most critical decisions is the NIL rate for TCS on remittance abroad if an education loan is taken to fund foreign education.

The TCS collected can now be factored in by the employer while determining the Tax Deducted at Source (TDS) on their salary. Without this, salaried taxpayers were expected to claim a refund of TCS after filing their return of income.

Rationalisation needs to be continued

The object of TCS is to track tax evasion. It is certainly not the objective to collect any amount as tax on the pretext of TCS from honest taxpayers who regularly pay their taxes on time. There is no virtue in collecting TCS only to refund it to the honest taxpayer when they submit their return of income.

A high upfront tax rate blocks a substantial portion of funds at the time of remittance, creating liquidity challenges, particularly for middle-income individuals. This blockage of funds not only increases the immediate cost of remittance but also discourages legitimate discretionary expenses such as overseas investments, travel, etc.

Rationalisation expected in Budget 2026

Ahead of Budget 2026, there is a humble request to reform the existing TCS provisions. It is now crucial to avoid collecting TCS from bona fide, honest individual taxpayers who pay their taxes in good faith and have no outstanding tax liabilities.

Further, there is a need to reduce the TCS rate and increase the threshold amount drastically.

The current TCS rate for a luxurious, costly car is 1%. The Income Tax Department can track the profile of the buyer of a luxurious car costing, say, upwards of ₹1 crore, with a TCS of only 1%.

The amount spent on drawing foreign exchange for the purpose of foreign travel or the purchase of movable and immovable property is done through banking channels, which are very efficient in India. Further, all information pertaining to foreign travel is readily available with the Bureau of Immigration, and the Income Tax Department can review any tax evasion, if any, using the efficient data available to it. If one can track a profile of a person who buys a luxurious car with 1% TCS, there is no need for a higher rate than 1%, even in the case of a person drawing money for foreign exchange, whether for travel or the purchase of movable or immovable property outside India.

The existing provisions of section 197, which enable a taxpayer to apply for a lower rate of TDS and are applicable on some items on which TCS is made, can be extended to the purchase of cars and drawing of foreign exchange for LRS.

Almost all individuals who intend to purchase cars exceeding ₹10 lakh and draw foreign exchange do not have any outstanding demand. The TCS is collected only to be refunded after a gap of 2 years in many cases. The facility to apply for reduced or nil TCS can be extended to individuals, allowing them to submit Form 13 to their Assessing Officer to obtain a certificate for reduced or nil TCS.

The Government has introduced an excellent TCS provision under the LRS to track high-value transactions as part of its fiscal policy and compliance measures. This has proven beneficial for revenue, but it has also resulted in capital blockage for the middle class, as they bear the burden of TCS. It is humbly prayed that the rates of TCS under the LRS shall be synchronised to 1% for all transactions, as transactions can be tracked from up to date data available with the relevant bodies of the Government, the threshold must be increased to ₹20 lakh with a facility extended to apply for and issue of a certificate under section 197 to honest and eligible taxpayers for either Nil or less rate of TCS.

(Butani is Managing Partner at BMR Legal Advocates; Kulkarni is a Senior Advisor at BMR Legal Advocates. Views are personal.)