Are you facing a liquidity crunch on paying TCS? Your employer can help

New form 12BAA: Adjust your TCS against TDS on salary

Are you concerned about facing a liquidity crunch due to tax collected at source (TCS) deducted on payments related to your trip abroad? You can reach out to your employer for help.

The income tax (I-T) department issued a notification on October 17, which said that a taxpayer could inform her employer about the TCS being deducted and the TDS (tax deducted at source) being deducted on other investments. Now, the employer can withhold the TDS on the employee's salary after adjusting other such deductions. All that an employee needs to do is fill up a new form, 12BAA, to tide over a potential liquidity crunch.

For example, spends of over Rs 7 lakh using debit or prepaid forex card on a foreign holiday attract a TCS of 20 per cent. If eligible, taxpayers can always claim a refund on this amount being withheld at the time of filing I-T returns. However, the wait may lead to a temporary constricted liquidity situation. Finance Minister Nirmala Sitharaman's Union Budget 2024-25 allowed employees to claim credit of the TCS deducted. Employers have to withhold TDS on every monthly salaried paid and deposit it with the I-T department. The TCS deducted can be adjusted against this TDS.

The department has notified that taxpayers have to submit form 12BAA to their employers to claim the credit of the TCS that has been withheld. “Employees can declare the TCS withheld on remittance overseas beyond the threshold, for say, education fees paid for children who are studying overseas or foreign travel as also TDS withheld on their non-salary income [interest on fixed deposit, for instance]. An employer will then take both the TDS and the TCS into account while computing an employee's taxable income and taxes.  The TCS can be adjusted against tax to be deducted from an employee's salary and she need not wait for refund to be claimed in her tax returns,” said Aarti Raote, Partner, Deloitte India.

It will be simpler to file I-T returns, too. An employer could not adjust an employee's TCS deducted against the TDS prior to this notification, as there was no such mechanism in place. “Earlier, while filing I-T returns, we could see that our clients have purchased cars, for instance, and the TCS has been deducted. As a result, refund claims could arise. However, refund claims will not arise following the notification as an employer would have taken all these details into account and computed the TDS [for income tax payable on salary] accordingly,” said Karan Batra, Founder, Chartered Club.

There is another benefit in store for taxpayers, whose spouses or children’s incomes have to be clubbed as per the I-T Act. "Employees will be able to report to their employers the details of tax and/or the TCS, which have been deducted against their spouses  and children's taxable income by virtue of clubbing provisions,” said Kuldip Kumar, Partner, Mainstay Tax Advisors.

The onus will be on employers to give credit of the TCS while computing the TDS to be withheld from employees’ salaries every month. “They have to appropriately report in form 16 and Form 24Q  [withholding return]. This will address the cashflow issue for the employees to avail the credit of taxes/TCS rather than claiming refunds through tax filing. This is a significant benefit as in some of the overseas remittances under LRS [liberalised remittances scheme],” he added.