Credit card transactions abroad will not be subject to tax collected at source (TCS) as they will no longer be considered under the Liberalised Remittance Scheme (LRS), the government clarified on Wednesday, bringing huge relief to those using international credit cards.
Government on May 16 2023 proposed an increase in rates on credit card spending abroad, from 5 per cent to 20 per cent. On June 29, 2023 it announced that the existing status quo will be maintained with credit cards being exempt from TCS. Centre also decided to shelve the hike TCS rates from 5 per cent to 20 per cent on overseas remittances, until October 1, 2023. The hike was scheduled to take effect from July 1, 2023.
Says Mayank Mohanka, Chartered Accountant and founder of TaxAaram, "International credit card spending by individuals, including purchases of overseas tour packages while abroad, will continue to be exempt from the LRS limit and TCS, until further notification. Maintaning status-quo provides relief to Indian travelers using their international credit cards abroad. However it brings back differential TCS treatment for foreign spending through international debit cards, prepaid forex cards, and direct purchase of foreign exchange, compared to international credit card spending."
Announcing its decision, the finance ministry said that it decided “to give more time for the implementation of the revised TCS rates and for inclusion of credit card payments in LRS”.
The LRS scheme aims to facilitate seamless international transactions, allowing residents to remit money abroad up to a maximum of $2.50 lakh per annum. Beyond this threshold, they will require prior approval from the Reserve Bank of India (RBI).
Using Credit Cards Abroad
TCS is a tax the seller collects on selected goods and services from the buyer. This tax applies to money transfers and expenses, such as overseas travel, shopping, and asset purchases.
If a person spends Rs 1,00,000 using a credit card during an international trip, he would have to pay Rs 20,000 as a 20 per cent upfront TCS on the total amount spent, taking the total expenses to Rs 1,20,000.
However, the exemption from the finance ministry provides a welcome respite for international credit card users. Credit card company Visa states their credit cards offer additional rewards and discounts when used with select travel partners. Further, they can convert their purchases into equated monthly instalments (EMIs) for up to 12 months or more, with an interest-free credit period of 45 days or more.
Says Arnav Pandya, a financial planner and founder Moneyeduschool, "When traveling abroad, it is advisable to use a combination of credit cards and prepaid forex cards. Credit cards are essential for places like hotels that often accept only credit cards. Forex cards offered by certain banks and fintech companies have minimal foreign exchange markups, reducing fees. However, it is wise to carry a small amount of cash as not all establishments accept cards. It's worth noting that the reprieve on credit cards may be temporary, as banks have been instructed to enhance their systems, potentially subjecting credit cards to Tax Collected at Source (TCS) in the future."
When using an international credit card, it is vital to check the terms and conditions to see if there is a foreign currency transaction fee. If such a fee exists, it is advisable to seek out a card that does not charge this fee.
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