International credit card spends outside India will attract 20% TCS: How cardholders may be impacted

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Spending in foreign exchange through international credit cards will be covered under the RBI’s liberalised remittance scheme (LRS), under which a resident can remit money abroad up to a maximum of $2.50 lakh per annum without the authorisation of the Reserve Bank, as per a Finance Ministry notification.

The Ministry on May 16 notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to include international credit card payments in the LRS. Any remittance beyond $2.5 lakh or its equivalent in foreign currency would require approval from the RBI.

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.

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.

The Union Budget 2023-24 hiked TCS rates to 20%, from 5% currently, on overseas tour packages and funds remitted under LRS (other than for education and medical purposes). The new tax rates will come into effect from July 1, 2023.

Let’s break down the details of this new rule and see how it affects your foreign trips and international subscriptions.

What Is The New Rule And When Will It Come Into Effect?

A recent rule introduced under the Foreign Exchange Management Act (FEMA) brought international credit card spending within the purview of the Reserve Bank of India’s LRS. Effective from July 1, all such spending will be subject to a 20% TCS, a tax paid at the time of making a transaction.

How Does The New Rule Work?

When you use your credit card abroad and make purchases in foreign currency, those expenses will now be counted towards the annual limit of $250,000 (₹2.06 crore) per person set by the LRS. On top of that, you’ll also have to factor in the TCS that will be added to your bill. In the past, international credit card swipes were exempt from TCS since they didn’t count towards the LRS limit.

If you’re planning a trip abroad, make sure to include the cost of TCS in your budgeting to avoid any surprises and ensure you’re prepared for the additional expense it brings along. It even applies when you’re trying to load up your Forex card. So cash might be your best bet for now.

If you happen to go beyond the $250,000 limit, you’ll need prior approval from the Reserve Bank of India (RBI) to indulge in those extra expenses.

Do Transactions Made In India Count?

Essentially, every spend made in a foreign currency will attract a 20% TCS, which will have to be added to the total cost of such a transaction. However, if you’re using your credit card to pay an overseas company in rupees, it will not fall under the LRS nor will it attract TCS. So if you want to buy a ₹10,000 product from Amazon’s US website and have it shipped to your doorstep in India, you will have to pay an extra ₹2,000 as TCS. But if you’re paying for a Netflix subscription in rupees, the tax doesn’t apply.

Are There Any Exceptions?

Credit card transactions made for educational and medical purposes can breathe a sigh of relief, as they are exempt from the new rule and still attract only a 5% TCS. Corporate credit cards will also be exempt from the new rule as they do not come under the LRS.

Can Taxpayers Reclaim TCS?

Taxpayers will have the opportunity to claim back the 20% TCS as a credit against their income tax liability. This means that when filing their income tax return (ITR) for the financial year in which the remittance was made, taxpayers can include the TCS amount as a credit. However, if you’re not a taxpayer, the TCS is simply an additional cost that you have to bear.