Your credit card payments overseas will attract a 20% TCS from July 1

From July 1, your credit card transactions abroad will get costlier. Not only will you have to pay a higher tax collected at source (TCS) of 20 per cent on each of these transactions, but you will also have to limit the spending to under $250,000 in a financial year.

The Centre has amended the Foreign Exchange Management Act (FEMA) rules, bringing international transactions via credit cards under the Liberalised Remittance Scheme (LRS). With this, international spending using credit cards will attract a 20 per cent TCS. The new rule will come into force on July 1.

Here is what the new rule means.

What is LRS?

The scheme, introduced in 2004 by the RBI, allows resident Indians to freely transfer up to $250,000 per financial year abroad. This is also applicable to transfers by minors. For amounts above $250,000, the individual needs to take prior approval from the RBI.

What is the new rule for overseas credit card spending?

From July 1, the payments made through credit cards abroad will be counted under the LRS limit. It will also be applicable on internet purchases abroad via credit cards, even if you place the order from India. This includes in-dollar subscriptions to foreign magazines and journals too.

These transactions will attract a TCS of 20 per cent. This tax rate was increased from 5 per cent previously to 20 per cent in Union Budget 2023-24. The mechanism of how TCS on overseas credit card spending will be collected is unknown.

If you spend $100 on buying something abroad using your credit card, you will need to fork out $120 now, with $20 going to the government as tax collected at source or TCS. 

However, taxpayers will be able to claim refunds of the TCS paid while filing their tax returns. This additional $20 paid as TCS will be adjusted against your tax liability.

How is the new rule different from the older one?

Till now, transactions made abroad via credit cards were not a part of the LRS limit. They were not counted in the $250,000 limit. They did not attract an additional TCS.

But now, customers must track every bill and be mindful of the spending limit on the next foreign trip.

Are there any exceptions?

The LRS limit does not apply to remittances for education or medical treatment.

Will 20 per cent TCS be applicable on payments on online purchases?

If the transactions are made through international credit cards on online platforms based in a foreign country, they will attract a 20 per cent TCS. For example, purchases made on Amazon.com will be subjected to a 20 per cent TCS but not those bought through Amazon.in. 

It will also include subscriptions to foreign magazines and journals via international credit cards.

What do experts say?

Experts Business Standard talked to believe that this step will need better financial planning from travellers as foreign trips may get costlier. It may also lead to a fall in India’s outward remittances.

“Although an individual would be eligible to adjust the TCS against his overall tax liability, he’ll require more funds/ cash “in hand” at the time of remittance(s) abroad, considering a 20 per cent deduction each time (which may, resultantly, be a sum of a substantial amount). This will invariably require a revamp of financial planning of individuals planning to spend money overseas, henceforth,” said Harish Kumar, partner at Luthra and Luthra Law Offices India.

“Individuals who frequently travel abroad for leisure or business purposes may experience a higher financial burden due to the increased tax rate on their remittances…The higher TCS rate could discourage individuals from making larger remittances for purposes other than education or medical treatment. It may lead to a decrease in the amount of money sent abroad for various reasons such as investment, purchase of assets, or other personal expenditures,” said Maneet Pal Singh, partner at IP Pasricha & Co.

He added that it could also impact investment decisions, foreign collaborations, and overall business activities.

Geetanshu Bhalla, director of the law firm The Virtual Compliance, said that the Centre must consider postponing the new rule’s implementation.