International Credit Card Spends brought under LRS, 20% TCS Applicable

Recent amendments in the Foreign Exchange Management Act (FEMA) have brought foreign exchange transactions made via credit cards under the Liberalised Remittance Scheme (LRS). Such transactions will also attract a TCS (Tax Collected at Source) of 20%, effective July 1, 2023. Under the Liberalised Remittance Scheme (LRS) all residents get a free remit of up to USD 2,50,000 per financial year for any current or capital account transaction or a combination of both.

Here is all you need to know about this change and how it affects credit cardholders.

What changes have been made?

On May 16, 2023, the Ministry of Finance issued a notification mentioning to omit rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. As a result, credit card spends in a foreign currency will now be a part of LSR’s annual limit of USD 2,50,000. Additionally, cardholders also have to pay TCS of up to 20% for foreign transactions made through a credit card.

As per the notification by RBI, the revised Schedule III said that individuals can make payments in foreign currency within the limit of USD 2,50,000 per annum. Any additional foreign exchange transaction made over and above the assigned limit will require prior approval from the Reserve Bank of India.

Payments made in foreign exchange for the following purposes are covered under Schedule III:

• Private visits to any country (except Nepal and Bhutan)
• Gift or donation
• Going abroad for employment
• Emigration
• Maintenance of close relatives abroad
• Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/check-up
• Expenses in connection with medical treatment abroad
• Studies abroad
• Any other current account transaction

Now, after the notification issued by the Ministry of Finance, payments made for the above categories using international credit cards will also come under LRS.

20% TCS for forex payments from July 1, 2023

As per the new guidelines, Budget 2023 has also increased TCS on foreign transactions under the LRS from 5% to 20%, this will be effective from July 1, 2023. However, this is not applicable on educational transactions and medical expenses.

No changes have been made under the remittances made for foreign education. A TCS of 0.5% will be applicable for the remittances made for education loans beyond Rs. 7 lakh. However, the money transferred overseas for education purposes other than education loan incurs a TCS of 5%, if the amount is above Rs. 7 lakh.

Besides education purposes, the TCS on remittances for booking overseas travel packages will increase from 5% to 20% as per the new rule.

From July 1, 2023, a TCS of 20% will be applicable on purchasing an overseas tour package from an international travel agent in foreign currency using a credit card. This is also applicable on purchasing foreign currency from an authorized dealer for the trip.

To sum up, the below-mentioned changes will be applicable from July 1, 2023:

How will this move impact credit cardholders?

The recent changes will definitely require people to be aware of the restrictions applied on the transactions made through international credit cards, which are listed out in Schedule III of the Rules. In addition to this, prior consent is required as mentioned if the caps set by the authority are breached.

Earlier, foreign currency payments made using a credit card were not listed under the LRS, which allowed an individual to make payments even above the threshold of USD 2,50,000. Only the payments made towards travel expenses on foreign visits were allowed under this scheme. Now, after the recent update, foreign travel payments will be covered under LRS.

As a result, international credit card transactions will be treated equally like other money transfer instruments, such as debit cards, cheques, drafts, etc.

The only exception to this amended LRS rule will be applicable for payments made through money held in Resident Foreign Currency (RFC) account in a bank in India.

Cardholders have to pay a TCS of 20% on foreign transactions besides educational and medical expenses.

Who will collect TCS?

TCS is collected from the cardholder whenever a foreign transaction is processed. From July 1, 2023, the TCS will be collected by the authorized dealer, i.e., the bank which has issued the credit card. Cardholders have to pay an additional amount of 20% to the bank which will be deposited in the credit cardholder’s PAN and will be adjusted against the income tax liability for the applicable financial year.

However, a process for TCS collection is yet to be designed wherein the cardholder will be asked to pay an additional 20% as TCS by a pop-up message. After approving the message, the amount will be automatically collected at the bank’s end.

How to get a TCS Refund?

TCS is not a tax; it is adjustable against a cardholder’s total income tax liability for the financial year. A TCS of 20% on foreign transactions like tour packages will increase the cash outflow. Also, a cardholder can apply for a TCS refund if he or she does not have sufficient tax liability to offset the TCS. However, the refund process could take several months, which can impact the cardholder’s cash flow and the overall credit limit.