How forex cards can make your international travel costlier now

Following a strong public backlash, the government relaxed the rules. Now, international transactions up to ₹7 lakh using debit and credit cards will not be subject to TCS. This ceiling will provide relief to a large number of travellers who use their cards to spend on smaller purchases such as food, local commute, shopping, etc. But the new guidelines, while benefiting those with debit and credit cards, excludes the cheapest and most transparent way of transacting overseas: forex.

What this means is that starting 1 July, loading a forex card with a foreign currency or buying the local currency of the country you are travelling to before your trip will demand an upfront 20% TCS from the very first transaction. This would translate to an expensive holiday for those who transact using a forex card or cash to save on foreign transaction fee and high forex mark-up charged on debit and credit cards. To be sure, you can adjust TCS against advance tax payment or get a refund later at the time of filing income tax return (ITR).

The forex markup

A forex card is the electronic version of cash. It is pre-loaded with one or multiple foreign currencies that can be swiped on the go to make all types of payments. It can also be used at an ATM in foreign countries to withdraw cash. All major banks and some fintech companies like BookMyForex offer forex cards.

The primary function of a forex card is to serve as a cheaper alternative to debit and credit cards. The only major charges on a forex card are forex mark-up at the time of loading the card and a small reloading fee of ₹50-150. To be sure, some fintechs also offer cards with zero mark-up and no reloading fee, such as BookMyforex.

 

On the contrary, foreign spends with a debit or a credit card attract double charges - currency conversion fee (or forex markup) of 2-3.5% and foreign transaction fee of up to 3.75% (GST is extra on both the charges). Some banks have started promising zero markup fees on their debit and credit cards but there’s a catch on such offerings. The mark-up that is waived off is either that charged by the payment network or the partner bank, which means the card is not completely zero-cost. For instance, Niyo’s Global travel card is a debit card that the company offers in partnership with SBM Bank and the bank’s commission is not passed on to the customer.

“Generally any debit or credit card comes with the two types of markups. First, network processor markup which is charged by network processors like VISA or Mastercard and it is typically negligible at around 0.1%. Second, the issuing bank mark-up (or commission) that is charged by the card-issuing banks and varies from 2% to 5%. This is completely waived off in case of Niyo cards," said Swapnil Bhaskar, head of strategy, Niyo.

Take note that global travel cards offered by the likes of Niyo, Fi and Jupiter are essentially debit cards linked to a bank account opened with a partner bank. These too are exempted from TCS for up to ₹7 lakh. Also, the forex markup on debit and credit cards is higher it is linked to interbank rates.

Considering all the charges, Mint’s calculation shows that you pay about 5% less in fees when transacting with a forex card (see graphic) compared to the other cards. Apart from costs, transacting with forex cards is also more transparent. You can check the breakdown of costs at the time of loading the card and estimate the extra outgo upfront. Whereas, in the case of debit/credit cards, the overhead charges are calculated real-time at the prevailing conversion rates, which are dynamic and often higher than mid-market exchange rate, and the final debited amount is shown in rupees in your bank statement, which may not give a clear picture of the extra amount you have paid in fees.

But, with 20% TCS on loading a forex card, the cost of transacting will go up and defeats the very purpose of using a forex card. This will prompt people to switch to the more expensive options of debit or credit cards just to save on the extra upfront cost.

The cash factor

Cards are not a substitute for cash. Travellers are advised to carry some cash in local currency because in most countries cash is preferred for smaller payments. Also, some remote areas may not even have robust infrastructure for digital payments. Besides, some countries, such as Thailand, require tourists to carry a minimum amount in the local currency, which means you cannot completely avoid the TCS cost when you convert Indian rupees to the local currency. If you get cash from a money changer abroad using your debit or credit card, 20% TCS won’t apply under the ₹7 lakh limit. But, money changers outside India can charge exorbitant mark-up of 5-10%.

“Keeping forex out of the ₹7 lakh ceiling creates disparity as it is a form of foreign currency converted from your own money, which a credit or a debit card does at the time of transaction. Besides, when one travels abroad, the general inclination is to carry that country’s local currency because you don’t know the conversion that will be charged. All payment instruments should be treated equally and we hope the government removes this discrepancy," said Sudarshan Motwani, founder and CEO, BookyMyForex. The All India Association of Authorised Money Changers & Money Transfer Agents has submitted a representation to the finance ministry seeking a level playing field for all overseas transactions regardless of the instrument used. “Common people use foreign currency cash (up to a maximum of $3,000), prepaid forex travel cards, and wire transfers, while the upper classes use international debit and credit cards," said Bhaskar Rao P., general secretary of the Association.

“Almost everyone carries a small amount of currency notes that are required as one lands in a foreign country. Workers who travel to the Gulf and other countries for work typically belong to lower-income groups and depend on cash. These semi-skilled workers probably won’t even know how to fill a credit card form and may not even be filing ITRs. A 20% TCS will impact this section massively," said Motwani.

Other changes

The new guidelines have added to some confusion where it pertains to tour packages. As per a tweet put out by MyGov, a citizen engagement platform owned and maintained by the government of India, overseas tour packages denominated in rupees booked through credit card will not attract 20% TCS until the ₹7 lakh limit is not exhausted. But, tour packages carry a 20% TCS with no exemption limit. “There is no mechanism to verify the purpose of payment made through credit card. Credit card payments are exempted up to ₹7 lakh, so tour packages booked with credit cards are also exempted," explained Karan Batra, managing partner, charteredclub.com. This means tour packages booked with debit cards will not enjoy the benefit and continue to attract TCS. This move will unwittingly incentivise credit card usage for booking overseas holidays through travel agents.

Among other changes, the government has also clarified that payments made during business travel will be exempted from TCS. “If the expenses have been incurred in discharge of work of employer and are not personal expenses of the employee, then these are outside the purview of the liberalised remittance system (LRS), subject to verification by the authorised dealer, which is a bank in the case of debit or credit card," said Mayank Mohanka, founder of TaxAaram India, and a partner at S.M Mohanka & Associates.