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Business News/ Money / Personal Finance/  New rule for international credit card users: 20% TCS, LRS limits, and other details explained
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New rule for international credit card users: 20% TCS, LRS limits, and other details explained

New rule for international credit card users: Earlier, the usage of international credit cards (ICCs) for making payments for fulfilling expenses during travel outside India was not included in the liberalised remittance scheme (LRS)

New rule for international credit card users: On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. (Pixabay)Premium
New rule for international credit card users: On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. (Pixabay)

New rule for international credit card users: Spending in foreign exchange through international credit cards will be covered under the RBI's liberalised remittance scheme (LRS). On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. Earlier, the usage of international credit cards (ICCs) for making payments for fulfilling expenses during travel outside India was not included in the LRS limit. Only debit cards, forex cards, and bank transfers were included.

“With immediate effect, transactions made with credit cards outside of India fall under the LRS's purview, enabling the higher TCS levy that was promised in the Budget for 2022–23 to take effect on July 1," said Vinit Khandare, CEO and Founder, MyFundBazaar.

Govt omits Rule 7 of the Foreign Exchange Management Rules, 2000

According to the notification, the Finance Ministry, in consultation with the RBI, has omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, thus effectively including forex spending through international credit cards under the LRS.‘Rule 7’ exempts overseas use of international credit cards from ‘Rule 5’, which mandates prior approval from the Reserve Bank of India.

Technically, a TCS levy of 5% will come into effect on such transactions till July 1 (except for medical and education-linked sectors), which would then increase to 20% after July 1.

“This is big. By removing rule 7, this changes the game. Every international credit card transaction, from today, made by an individual => will be under LRS limits. Means 5% TCS till July 1. And 20% Tax collected at source after that. (Can be adjusted against other taxes)," Tweeted Deepak Shenoy, Founder and CEO of Capital Mind.

 

Now, there is an extra cost in that there will be a 5% TCS charge for credit card holders who travel abroad or make payments abroad. As per Vinit, differentiating between distinct uses of credit cards will require clarification from the authorities. 

Foreign costs must now be separately listed in the credit card statement for each category. So far as operational problems are concerned, CBDT or RBI will need to provide clarification, he added.

Can taxpayers claim ‘20% TCS’ back?

Archit Gupta, Founder, and CEO, Clear said by application of TCS on credit card transactions on foreign land, individuals will see a higher bill on their cards, potentially blocking money for several months until a return is filed/refund is claimed and tax already collected is adjusted. Banks issuing credit cards will have set up processes for compliance and their burden will increase as a large number of Indians travel abroad and credit cards are commonly used for payments.

Taxpayers may now have to keep track of these TCS entries in their Form 26AS, some of them who spend on their employer's behalf may be averse to bear the expense and may prefer to opt for other modes of payment, where there is no direct TCS implication for them, added Gupta.

20% TCS trending on social media

The Government’s decision to impose 20% TCS on international credit card spending has caught the attention of Twitterati as “20% TCS" was one of the top trending topics on social media on Thursday morning.

LRS scheme

Under the LRS scheme, Indian residents are allowed to remit up to $250,000 per year without any prior approval from the RBI.

What is TCS?

Banks deduct tax collection at source (TCS) on foreign remittances, So, basically, TCS is collected by the seller at the point of sale

@Ravisutanjani in a series of tweets explained how your next foreign trip is becoming expensive 20% TCS will be calculated.

Priya has a credit card with a credit limit of 4 Lakh. She went on an International Vacation to Singapore. She used her credit card for all transactions abroad. Her total expenditure is say 2 Lakh. Now 20% TCS- 40,000. The total amount will come to 2 lakh 40,000. Your bank may also charge additional forex markup, GST when you use a credit card abroad)

So, basically, Priya'scredit card issuing bank will deposit that 20% TCS against her PAN. Priya can claim this TCS at the time of filing her income tax returns.

 

What is the TCS rate applicable at present?

The Union Budget 2023-24 hiked TCS rates to 20 per cent, from 5 per cent currently, on overseas tour packages and funds remitted under LRS (other than for education and medical purposes).

What must Indians now keep in mind when using an international credit card in foreign land?

Effective July 2023, Indian travellers booking international travel outside of India will encounter a significant change of a 20% tax collected at source (TCS). This tax will be collected by authorised banks or travel agents for international travel tour bookings and now on credit cards

“It is essential for Indian travellers to factor in this additional financial obligation while making payments for overseas travel which may increase the overall expenditure for their trip. However, travellers can claim TCS credit while filing their tax return, which means that the net impact on their travel costs will not change," said Rikant Pittie, Co-Founder, EaseMyTrip.

This will help trace large-value international transactions

Although one of the goals of the change is to make it easier to trace large-value international transactions, it has been made clear that the modifications will not apply to payments made for purchasing foreign goods or services from India, such as subscription services for newspapers, magazines, or online streaming services.

According to Amit Gupta, MD, SAG Infotech, the government believes that imposing this TCS would help tune and reveal high-cost forex transactions and make certain that people pay their fair share of taxes. By levying the tax at the time of the transaction, it would discourage tax evasion and encourage compliance.

It is just for transactions covered by Schedule III (of the FEM rules) and not for payments made for the acquisition of goods or services from abroad. The domestic travel sector had generated this need, added Vinit Khandare.

20% TCS on foreign remittances under LRS: Finance Ministry answers all your queries

The ministry issued a list of FAQs (frequently asked questions) detailing the reasons for the inclusion of foreign spending using credit cards.

  • A TCS of 5 per cent will be levied on expenses exceeding 7 lakh towards medical treatment and education, while other expenses including investment in real estate, foreign tours, and travel would attract 20 per cent.
  • For those availing loans for overseas education, a lower TCS rate of 0.5 per cent would be levied above the 7-lakh threshold.

 

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ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Updated: 19 May 2023, 11:05 AM IST
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