Liberalised Remittance Scheme (“LRS”) is a facility under which resident Indian individuals are permitted to freely remit upto USD 250,000 in each financial year (April to March) for a permissible current account transaction, capital account transaction or a combination of both.
Prohibited and permitted transactions:
Prohibited transactions under the LRS scheme include purchase of lottery tickets, sweepstakes, trading in foreign exchange abroad, and capital account remittances to countries identified by the Financial Action Task Force (FATF) as non-cooperative countries and territories.
Permitted LRS transactions include availing foreign exchange for going abroad for education, maintenance of close relatives abroad, gift or donation and business travel. Investment in stock options/ employee share plans is also one of the permissible transactions under the LRS route.
Budget proposal and effective date for applicable TCS rates:
The 2023-24 budget had an announcement in relation to tax collected at source for remittances under the LRS route, as well as credit card payments, overseas tour packages, etc., perhaps to widen the tax net. Post the budget announcement, it was decided to give adequate time to banks and credit networks to put in place requisite IT solutions. Accordingly, transactions through international credit cards while being overseas would not count towards LRS, and hence would not be subject to TCS. However, a threshold of INR 7 lakhs per financial year per individual has been made applicable for all categories of payments, regardless of the purpose. Beyond the said threshold of INR 7 lakhs, applicable TCS is 0.5% if the remittance is for education financed by loan; 5% TCS if the remittance is for education (other than financed by loan) or medical treatment, and 20% TCS for other remittances.
For stock options in particular, prior to the coming into effect of the changes proposed in the Finance Act, 2023, the TCS rate applicable was 5%, which is now revised to 20%. This will have an impact on the investment amount in stocks given that TCS affects immediate cash flow.
These provisions are notified to be effective from October 1, 2023, and therefore while structuring stock option schemes and employee share plans, the tax impact of such investments also needs to be borne in mind.
Several questions have emerged since the notification of these TCS provisions. For example, do these changes affect an individual who has already invested some amounts prior to the coming into force of these provisions? Does timing of remittance help? So on and so forth.
There will be no TCS applicable for permitted transactions for an aggregate amount upto INR 7 lakhs per individual. So one may be able to optimise the same with the family as the limit applies to each individual. All remittances upto September 30, 2023 would be subject to the old tax rate, and post such date all remittances would be subject to the revised rates.
Concerns in relation to stock options and employee share plans:
Stock options/ employee share plans have gained popularity over the years, not only in terms of attaching significant value to compensation of senior management contingent on overall organisation performance, but also in the form of compensation to key employees and promoters/ founders. In start-ups, key employees as well as promoters/ founders sacrifice their immediate cash compensation in lieu of stock options that they expect to disproportionately compensate in value within a foreseeable time. It is also common for multi-national companies to permit their employees to invest in the stock of an overseas parent/ listed entity so that employees including those of India subsidiaries benefit from the growth in the value of the stock.
Tax implications have played a key role in the decision making on whether such investments in stock options/ employee share plans are feasible.
While initially it was the timing of taxation of stock options, the recently introduced higher rate of TCS on investments under the LRS route, is raising some additional concerns.
(Partner at JSA).
Is there a higher tax outgo?
TCS deductions are considered when computing advance tax obligations. So, it may not affect resident individuals who otherwise have an advance tax obligation or an overall tax liability that is greater than the TCS amount.
Typically in the case of stock options, tax is payable at the time of exercise, on the perquisite value of stock options/ share awards, being the difference between the fair value and the exercise price. A deferred payment is permitted for employees in eligible start-ups, being the earlier of employment termination date, sale of relevant shares or 5 years from the date of allotment of shares.
Under the TCS regime, the rate of 20% is on the remitted amount, not on the differential value. As regards timing of remittance for stock options that trigger a 20% TCS rate, individuals may consider and time such remittances in the last quarter of the financial year, particularly if there is a case for refund since the additional tax paid may be received by August/ September. It is however unclear how the deferred payment for eligible start-ups would apply given the TCS applicable at the time of remittance.
Some of these gating aspects and concerns are essential to be addressed to encourage such investments and not trigger additional taxation or cash outflow when the benefit of investment is yet to be realised.
