International Credit Card transactions will soon become costly. The amount spent on foreign transactions will see a levy of TCS- tax collected at source – from July 1, 2023. The rate of TCS is 20% and will be charged irrespective of the amount of dollars spent. The reason why transactions done on international credit cards are now taxed is that they have been brought under RBI’s LRS – RBI’s Liberalised Remittance Scheme (LRS).

Update: On May 19, Government decided that any payments by an individual using their international Debit or Credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS. New rates are being implemented under the Liberalized Remittance Scheme (LRS) from July 1, 2023.

On Tuesday, May 16, 2023, the Central Government published the modified Foreign Exchange Management Act (FEMA) guidelines, bringing credit card use under the LRS.

The levy of 20% TCS in some of the LRS transactions was first announced in Budget 2023. The rule has now been notified by the Ministry of Finance and will be effective from July 1 onwards. The international Credit Card transactions will be covered under the overall limit of Liberalised Remittance Scheme i.e. USD 250000 per financial year.

Nischal S Arora, Partner- Regulatory, Nangia Andersen India explains why International Credit Card Transactions will now be levied a TCS and why it will attract LRS rules.

“The RBI, vide notification dated 16 May 2023, has omitted Rule 7 of the FEM (Current Account Transactions) Rules, 2000 (’the Rules’). It is interesting to note that Rule 7 was introduced almost 20 years back as a liberalisation measure to exempt International Credit Card (‘ICC’) Transactions from the ambit of restrictions set out under Rule 5, i.e., transactions included in Schedule III to Current Account Transaction Rules, 2000 requiring prior RBI approval beyond monetary ceilings. Further, no separate monetary/item-wise ceiling was imposed by RBI for the use of ICCs when the amendment was made.

Thus, the use of ICC by residents on a visit outside India or even for international purchases on the Internet was hitherto not supposed to be included while computing the overall LRS limit of USD 250,000 per person per financial year.

The same now having been omitted makes sure that ICC transactions are also considered for the purposes of determining the limit of USD 250,000 under LRS.”

The Point 7 of the rules says:

“Use of International Credit Card while outside India – Nothing contained in rule 5 shall apply to the use of International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India.”

Any resident person, even a minor (countersigned by a guardian), is currently permitted to remit up to 2.5 lakh US dollars (USD 2,50,000) in any financial year under the LRS guidelines. It amounts to around Rs 2 crore at a conversion rate of Rs 82 to a dollar.

The amount spent on international Credit Card transactions will bring down the maximum limit available under LRS. Effectively, 20% is the amount that gets blocked as a refund can be taken by the taxpayer while filing ITR.

For the purpose of any education, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E and for medical treatments abroad, the TCS stands at 0.5% and 5% respectively. However, on foreign tour packages and for other remittances such as buying stocks, and properties abroad, the TCS limit has been proposed to be 20% in the Budget 2023.

Indians can send money abroad through the Liberalised Remittance Scheme (LRS) of the RBI. The RBI’s LRS is a one-stop shop for all your issues regarding foreign exchange, regardless of whether you’re thinking about making an international investment, taking a trip abroad, or even sending your kids to study there. RBI LRS primarily addresses the many parts of currency-related issues, such as how many dollars can be carried out of India and how many dollars can be transmitted overseas.

Currently, there is Tax Collection at Source (TCS) of up to 5% on remittances of Rs 7 lakh or more in a fiscal year. If the total foreign exchange facility availed under LRS in a financial year is Rs 10 lakh, which you want to remit abroad, a TCS at 5 per cent will be applicable on Rs 3 lakh. (Rs 10 lakh minus Rs 7 lakh) and tax collected will be Rs 15,000.

From July 1, the threshold limit is being removed and TCS will get levied on specified transactions on any amount spent or remitted abroad. So, if you buy US stocks or use a card overseas, A TCS of 20% will be levied and the deducted amount will be forwarded to the government. The operational implementation process by RBI and credit card issuing companies and banks are awaited.