Starting from May 16, spending in foreign currency using international credit cards is now covered under the Reserve Bank of India's liberalised remittance scheme (LRS). The Finance Ministry, in consultation with the RBI, has amended the rules under the Foreign Exchange Management Act (FEMA) to include credit card spending outside India within the LRS.
Previously, the LRS limit did not include the usage of international credit cards for expenses incurred while traveling outside India. Only debit cards, forex cards, and bank transfers were included.
To enable this inclusion, the Finance Ministry has omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which previously exempted the overseas use of international credit cards from the requirement of prior approval from the Reserve Bank of India.
However, foreign transactions (non-INR) carried out in India using International Credit Cards were always considered within the LRS limit and thus subject to TCS provisions.
With the recent amendment to the Current Account rules, the exemption for using International Credit Cards while abroad has been removed. Consequently, these transactions are now included in the LRS threshold of USD 250,000 and are subject to TCS.
Until July 1 (except for medical and education-linked sectors), a Tax Collected at Source (TCS) levy of 5% applies to such transactions. After July 1, the TCS rate will increase to 20%, as announced in Budget 2023-2024.
Finance Ministry in a press release dated 19/05/23 has said that any payments made by individuals using their international Debit or Credit cards, up to Rs 7 lakh per financial year, will be exempted from the LRS limits. Consequently, these transactions will not be subject to any TCS requirements.
Q What are the changes or increases in rates of TCS?
| Type of remittance |
Present TCS Rate (upto 30.06.2023) |
New TCS Rate (from 1.07.2023) |
| For the purpose of any education (remittance is from loan obtained from any financial institution) | 0.5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh | No change |
| For the purpose of any education (not out of loan) and any medical treatment | 5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh | No change |
| Overseas tour package | 5% without any threshold limit | 20% without any threshold limit |
| Any other remittance (for bonds, shares, real estate gifts, etc.) | 5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh | 20% without any threshold limit |
Q What is the liberalised remittance scheme (LRS)?
A The Liberalised Remittance Scheme (LRS) is a scheme introduced by the Reserve Bank of India (RBI) in 2004. It allows resident individuals of India to remit up to USD 250,000 per financial year (April-March) without prior approval from the RBI.
Q What is TCS? What happens to the 20% I pay?
A TCS, or Tax Collected at Source, is a tax collection mechanism to collect taxes at the source of certain specified transactions. It requires the seller to collect a specified percentage of the transaction amount as tax from the buyer or recipient and deposit it with the government.
Let's understand this case with an example:
Mr. Ninja has a credit card with a credit limit of Rs. 2 lakh. He goes on an international vacation and uses his credit card for all transactions abroad. Let's say his total expenditure is Rs. 1 lakh. According to the new regulations, a 20% TCS (Rs. 20,000) is applicable to such credit card transactions made abroad.
In this scenario, Mr. Ninja's credit card issuing bank is responsible for collecting the TCS amount of Rs. 20,000 from him and depositing it with the government against his PAN (Permanent Account Number).
When Mr. Ninja files his income tax returns, he can claim the TCS amount of Rs. 20,000 as a credit against his total tax liability. This means that the TCS amount will be adjusted against his overall tax liability, potentially reducing the tax he needs to pay.
Q What is the current applicable TCS rate?
A The current TCS rate is 5%. Starting from July 1st, 2023, the TCS rates have been increased to 20% as per the Union Budget 2023-24 for overseas tour packages and funds remitted under LRS (except for education and medical purposes).
Q Do I need to pay TCS if I pay using International Debit Card/Travel Card?
A Yes, even if you use International Debit Card/Travel Card outside India, you would still need to pay the 20% TCS upfront.
Q So if I spend above USD 250,000 via Credit Card, do I need to take RBI approval?
A After the amendment in FEMA, credit card transactions will be included in the LRS limit of $250,000. Any foreign remittance or purchase exceeding this limit would require prior approval from the RBI.
Q How will the banking company determine at the point of sale whether to collect TCS at a higher rate or not?
A Yes, clarification from CBDT or RBI will be necessary to differentiate credit card usage. If the card is used in a foreign hospital, TCS will not be applicable at a higher rate, resulting in different TCS requirements.
This Article was authored by Tushant a passionate blogger by .
Co-founded Tax Ninja with the aim to serve knowledge digitally.
He's on a valiant quest to share his knowledge of Income Tax and GST.
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