You are currently viewing Explanation of the new 20% TCS and LRS restrictions for overseas credit card users

Explanation of the new 20% TCS and LRS restrictions for overseas credit card users

Changes to the rules for those using credit cards abroad: Previously, the liberalised remittance scheme (LRS) did not cover the use of ICCs to pay for expenditures incurred when travelling outside of India.

Changes to the rules for those using credit cards abroad: The Reserve Bank of India’s (RBI) new liberalised remittance scheme (LRS) includes the use of international credit cards to make purchases in foreign currency. Credit card purchases made outside of India are now subject to the LRS after the Finance Ministry on May 16 issued the modified rules under the Foreign Exchange Management Act (FEMA). Previously, the LRS cap did not apply to purchases made with international credit cards (ICCs) to cover expenses incurred outside of India. Only bank transfers, debit cards, and foreign currency cards were accepted.

According to Vinit Khandare, CEO and Founder of MyFundBazaar, “with immediate effect, transactions made with credit cards outside of India fall under the purview of the LRS, enabling the higher TCS levy that was promised in the Budget for 2022-23 to take effect on July 1.”

Rule 7 of the Foreign Exchange Management Rules, 2000 is omitted by the government.
The announcement states that Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, has been removed after discussions between the Finance Ministry and the RBI, thereby bringing foreign exchange spending made with international credit cards within the LRS.As per ‘Rule 7’, international credit card use is excluded from ‘Rule 5’, which requires prior clearance from the Reserve Bank of India, when used in a foreign country.

Technically, such transactions will be subject to a TCS levy of 5% until July 1 (save for medical and education-related industries), and then 20% thereafter.
Any international purchases or withdrawals made with a credit card will now incur an additional 5% TCS fee. According to Vinit, official clarification is needed about the distinction between specific credit card uses.

The credit card statement must now itemise any foreign purchases made. Concerning issues with operations, he noted that clarity would be required from CBDT or RBI.

Is it possible to get the “20% TCS” tax back?
Clear founder and CEO Archit Gupta warned that individuals’ credit card bills might increase by as much as 30 percent if TCS is applied to purchases made on foreign soil, effectively freezing their funds for several months until a tax return is filed, a refund is sought, and the tax that has already been collected is reduced. Since many Indians travel abroad and use credit cards for payments, issuing banks would need to put in place procedures to ensure compliance, which will increase their workload.

Some taxpayers who incur expenses on their employer’s behalf may be unwilling to shoulder the cost and may prefer to select alternate ways of payment, where there is no direct TCS effect for them, Gupta added.

The TCS 20% social media trend
Twitterati have taken notice of the government’s intention to impose a 20% TCS on all overseas credit card purchases, with “20% TCS” trending as a top topic on Thursday morning.

Using the LRS
Under the LRS system, Indian citizens can send up to $250,000 abroad annually without needing permission from the RBI.

Define TCS.
Banks take off TCS (tax collection at source) from wire transfers to international accounts. TCS is, therefore, collected by the retailer at the time of purchase.

In a series of tweets, @Ravisutanjani detailed the 20% TCS that would be added to the cost of your next international vacation.

Priya’s credit card has a 4 Lakh limit. Her exotic vacation took her to Singapore. While abroad, she relied solely on her credit card. We’ll estimate her spending at 2 Lakh rupees. Now TCS 20% off, or 40,000. The grand sum is 2,040,000 Indian rupees. When you use your credit card abroad, your bank may tack on a global sales tax (GST) and a foreign exchange fee.

That 20% TCS would be deposited against Priya’s PAN by the bank that issued her credit card. Priya can use this TCS as a deduction when she files her taxes.


Leave a Reply