20% TCS on Credit Card: International Credit Card spending outside India would come under the Liberalised Remittance Scheme (LRS) from May 16, 2023. Spending with international credit cards will also attract a higher rate of Tax Collected at Source (TCS) at 20% effective July 1, 2023.

The Central Government on Tuesday (May 16, 2023) notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. The amended rule would be applicable from July 1, 2023.

While the move is expected to help track high-value overseas transactions, the Government’s decision to impose 20% TCS on international credit card spending has caught the attention of Twitterati as “20% TCS” was one of the top trending topics on the social media platform on Thursday morning. The topic is being discussed since Wednesday itself as the notification came late at night on Tuesday.

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“This is big. By removing rule 7, this changes the game. Every international credit card transaction, from today, made by an individual => will be under LRS limits. Means 5% TCS till July 1. And 20% Tax collected at source after that. (Can be adjusted against other taxes),” Tweeted Deepak Shenoy, Founder and CEO of Capital Mind.

The “20% TCS” decision has also received a lot of flak from several Twitter users.

Key Points of FEMA Notification and Implications

  • Credit card transactions by individuals abroad will be subject to the annual LRS limit of $2,50,000. Any higher spending would require prior approval from the Reserve Bank of India (RBI), The Financial Express reported today.
  • International credit card transactions will also attract TCS at the rate of 20% from July 1. The TCS rate till June 30 is 5%.
  • The use of credit cards by Indian users on foreign visits has come under the ambit of LRS effective May 16, 2023. The LRC is overseen by RBI.
  • The higher TCS rate would be applicable for international credit card transactions from July 1, 2023.
  • While this step is aimed at increasing RBI’s grip on foreign remittances, the 20% TCS rule may lead to cash flow issues for high-net-worth individuals (HNIs). According to tax experts, the move may also lead to a higher tax outgo for many individuals.
  • Experts are hoping that the Government would provide more clarity on how the tax authorities would distinguish between international purchases on the Internet and credit card spending abroad.

What transactions are included in FEMA?

The FEMA notification now includes several types of payments done through international credit cards while abroad such as air travel, entertainment, hotel booking, food etc. For spending above $2,50,000 (approx Rs 2.06 crore), prior approval will be required.

According to Prakash Gadia, Managing Director of Resurgent India, the new notification means that foreign exchange spending on personal transactions of expenses and gifts, and medical treatment will be subject to a ceiling of $2,50,000.

The 20% TCS rule may lead to a drop in the value of transactions through international credit cards, experts believe.

Can you claim credit back?

Taxpayers would be able to claim the “20% TCS” back at the time of Income Tax Return (ITR filing). However, the tax collected at source may result in cash flow issues for some taxpayers as the refund would be available only after the processing of ITR.