The Government of India has recently introduced a significant change that directly impacts individuals' overseas spending. Under the newly amended Foreign Exchange Management Act (FEMA), all international credit card transactions made in foreign currency now fall under the Liberalised Remittance Scheme (LRS). This alteration introduces a set of rules that need to be understood by Indian residents who frequently use international credit cards for their purchases. In this article, we will explore the key details of the 20% Tax Collected at Source (TCS) on international credit card transactions and its implications.
What is 20% TCS?
Previously, Indian residents could freely remit up to $2,50,000 (approximately Rs. 2 Crores) out of India in a financial year without requiring any RBI approval. This amount was utilised for various purposes such as travel, education, medical treatment, and more. However, there was no specific limit for purchases made using international credit cards. The recent amendment now includes all foreign currency transactions, including those made with debit cards, credit cards, or forex cards, within the overall limit of $2,50,000 in a financial year (April to March). If this limit is exceeded, approval from the RBI becomes necessary. The transactions falling under the LRS are subject to Tax Collected at Source (TCS), which implies that the tax will be collected in advance at the time of making the payment itself.
Impact of 20% TCS
Starting from July 1, 2023, the rate of TCS on international credit card transactions has been increased from 5% to 20%, as announced in the Budget 2023-24. This means that foreign currency transactions made using an international credit card within the limit of USD 2,50,000 will be subject to a hefty TCS of 20%.
The Government has responded to feedback and provided some relief. The 20% TCS will now only apply to expenses incurred above Rs 7 Lakhs. So, any expenses above Rs 7 Lakhs, whether it's for travel, hotel bookings, or general purchases, will be subject to the 20% TCS. Specified transactions, such as medical expenses or education costs up to Rs 7 Lakhs, will continue to enjoy a lower TCS rate of 5% (0.5% if education expenses are incurred using an education loan).
Also, the TCS amount collected by the bank will be available as a credit and can be adjusted towards your quarterly advance tax or annual income tax liability. So, while it may feel like a blow to your holiday budget, you'll have the opportunity to offset it against your tax dues.
How will 20% TCS affect foreign travel?
For individuals planning to use international credit cards for travel expenses, such as a $10,000 expenditure, they will now be required to pay a TCS of $2,000, which will be collected by the bank. It is worth mentioning that additional bank charges and GST will also be levied on the TCS amount, adding to the overall expense.
Why did the Government introduce 20% TCS on international credit cards?
The Government's decision to implement these changes is driven by two primary factors. Firstly, by bringing international credit card transactions under the LRS, the Government aims to track high-value spends made by individuals in foreign territories. This move enhances transparency and helps prevent any potential misuse. Secondly, from a financial standpoint, the Government aims to capitalize on the substantial amount of money being remitted under the LRS. According to RBI data, Indians remitted a staggering $4.82 billion in just two months (January and February 2023), with a significant portion being spent on travel. By implementing the 20% TCS, the Government stands to potentially collect close to $512 million from these transactions. While individuals may be able to adjust some of this tax against their tax liability or claim it as a refund, the Government gains an advantage in terms of timing.
How to avoid 20% TCS on foreign travel?
- ₹7 lakh limit is not applicable for each individual card. It is applicable per person. Therefore, to avoid breaching the spending limit, family members can distribute expenses across multiple individuals.
- You can have your friends or family abroad incur the expenses on foreign land and you can reimburse them in cash later.
- To avoid TCS on tour packages, book flights and hotels separately or use multiple cards for each transaction.
- TCS is not an additional tax but an advance tax collected on your behalf. TCS credit can be adjusted against actual tax liability or claimed as a refund if you have no tax liability.
- TCS amounts will reflect in Form 26AS of the Indian resident individual after quarterly TCS returns are filed by the authorized bank. Claim credit for the tax payment on international transactions when filing income tax returns in India.
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