Effective from July 1, 2023, the Indian government has increased the tax collection at source (TCS) rate on foreign remittances under the Liberalised Remittance Scheme (LRS) from 5 percent to 20 percent and also brought spends done via credit cards under the LRS. Let’s understand how this impacts those who would use credit cards for foreign trips. Before that we need to understand a few things-

1. What is LRS?
2. What is TCS?
3. What has changed?
4. How does TCS work for credit card transactions? 
5. Why is it done?
6. How to avoid 20% TCS on foreign travel?

What is LRS?

The LRS scheme enables Indian residents to transfer funds overseas without any restrictions or the need for prior approval from the Reserve Bank of India (RBI). All resident individuals, including minors, are eligible to remit up to $250,000 per financial year under the LRS for any permissible current or capital account transaction. However, for remittances exceeding this specified limit, prior approval from the RBI is required.

What is TCS?

TCS is a type of tax that is collected by a third party from the buyer of certain goods and services, which is then remitted to the government. The purpose of TCS is to ensure compliance with tax laws and prevent tax evasion. 

What has changed?

The government has amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000 to bring international credit card spending under the LRS. And 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 $250,000 will be subject to a hefty TCS of 20%. 

The Government has later clarified that 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 does TCS work for credit card transactions? 

The TCS will be collected by your bank or credit card company at the time of billing. The bank will collect an additional amount of 20% from your credit card account and deposit it with the government as TCS. For example, if you spend $1000 on your credit card abroad, your bank will charge you $1200 ($1000 + 20% TCS) and pay $200 as TCS to the government. 

The TCS will be applicable to all types of credit cards, including forex cards and co-branded cards. It will also apply to debit cards and currency purchases, however, no TCS shall be applicable on individual payments up to Rs. 7 lakh in a financial year. The TCS will not apply to transactions made in Indian rupees or in Nepal and Bhutan. 

Why is it done?

The Government’s decision to implement these changes is driven by two primary factors.

• By bringing international credit card transactions under the LRS, the Government aims to track high-value spends made by individuals in foreign territories to bring transparency and help prevent any potential misuse.
• 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?

• Rs. 7 lakh limit is applicable for each person and not on individual card. Therefore, to avoid breaching the spending limit, have spends distributed among credit cards in name of different family members.
• 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.

What are your thoughts about the changes to LRS in regards to credit card spends ? Feel free to share your views in the comment section below.