With the recent amendments in the Foreign Exchange Management Act (FEMA), international credit card spending now falls under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS). This change has brought a significant impact on the tax liabilities and expenses of individuals using credit cards for transactions outside India.
Before delving into the changes in credit card payments, it is essential to understand the LRS. The LRS is a scheme by the RBI that allows Indian residents, including minors, to remit up to $250,000 per financial year (April – March) for any permissible current or capital account transactions. Under this scheme, any additional remittance beyond the said limit would require prior approval from the RBI.
The Finance Ministry, in consultation with the RBI, has amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000. These amendments, effective from May 16, 2023, have resulted in the inclusion of international credit card payments under the LRS. The primary implication of this change is that credit card spending in foreign currency will now be a part of the LRS’s annual limit of $250,000 per person. Additionally, these transactions will be subject to Tax Collected at Source (TCS).
The Union Budget 2023-24 has increased TCS rates for foreign remittances under the LRS from 5% to 20% (except for education and medical purposes). This new rule will be effective from July 1, 2023. TCS is a type of tax collected by the seller of selected goods and services from the buyer, and in the context of foreign remittance transactions, this tax is collected when individuals send money abroad
The increased TCS rates will affect different types of transactions under the LRS, including:
1. Private visits to any country (except Nepal and Bhutan)
2. Gifts or donations
3. Going abroad for employment
4. Emigration
4. Maintenance of close relatives abroad
5. Travel for business, conferences, specialized training, or medical expenses
6. Expenses related to medical treatment abroad
7. Studies abroad
8. Any other current account transaction
As a result of these changes, individuals using international credit cards for transactions during their travels outside India must be aware of the restrictions and monetary caps imposed on certain identified transactions. The prior consent requirement will only apply if these limits are breached.
The new TCS rule has several implications for individuals using international credit cards for transactions outside India:
From July 1, 2023, TCS rates on remittances for booking overseas travel packages will increase from the existing 5% to 20%. This change means that if you purchase an overseas tour package from an international travel agent in foreign currency using your credit card, you will have to pay a TCS of 20% from July 1, 2023. This also applies if you purchase foreign currency individually from an authorized dealer for your foreign trip.
The upfront TCS of 20% on tour packages will increase the cash outflow for individuals planning foreign trips. If the user does not have an adequate tax liability to offset the TCS, they will have to file for a refund, which could take several months and severely impact their cash flow. Therefore, it is essential to factor in this condition when budgeting for your next foreign trip.
The responsibility of collecting TCS will fall on the authorized dealer, i.e., the bank that issued the credit card. The bank will collect an additional 20% from the credit cardholder to deposit the same as TCS, which can be adjusted against any income tax liability for that financial year. This process may involve additional compliance and operational nuances, including pop-up messages on the nature of the transaction and automatic triggering of TCS collection.
To minimize the impact of the new TCS rule on your international transactions, consider the following tips:
1. Plan your spending carefully
Be aware of the LRS limits and TCS rates to avoid breaching the caps and incurring additional tax liabilities.
2. Budget for TCS
When planning your foreign trips, factor in the 20% TCS on tour packages and other transactions.
Read More: LEGAL WAYS TO SAVE INCOME TAX FOR BUSINESS OWNERS
3. Monitor your LRS usage
Keep track of your remittances under the LRS to ensure you do not exceed the annual limit of $250,000.
4. Consider alternative payment methods
Evaluate other money transfer instruments and explore their tax implications to minimize your tax liabilities.
The recent changes in credit card payments and TCS rates under the LRS have significant implications for individuals using international credit cards for transactions outside India. While these changes aim to curb tax evasion and increase accountability, they also come with increased compliance burdens and operational challenges. To navigate these changes, credit cardholders must plan their spending and foreign trips carefully, budget for TCS, and explore alternative payment methods.
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