Starting from 1 July, a significant change in tax regulations will affect Indians traveling overseas and using credit cards for their expenses.
The finance ministry has announced the implementation of a 20% tax collected at source (TCS) on credit card spend during foreign travel. However, there are exceptions for expenditures related to education or medical treatment, which will be subject to a lower tax rate.
The amendments to the foreign exchange management rules have raised concerns among experts, who believe this could potentially impact cash flow for individuals traveling abroad.
The finance ministry recently clarified the amendments made to the foreign exchange management rules, announcing a 20% tax collected at source (TCS) on credit card expenses incurred by Indians during overseas travel.
This tax will be levied starting from 1 July. However, expenses related to education or medical treatment during foreign visits will be subject to a lower tax rate.
Under the new regulations, the credit card issuer will collect the tax when the bill is settled in Indian rupees.
This tax amount can later be adjusted against the cardholder’s tax liability at the time of paying taxes. While salaried individuals will need to wait until the time of filing returns, professionals can use this credit to offset their advance tax liability, which is paid on a quarterly basis.
Experts have raised concerns about the potential cash flow issues that may arise for people traveling abroad due to the TCS requirement.
The inclusion of credit card usage during foreign visits within the purview of the Reserve Bank of India’s liberalized remittance scheme (LRS), which attracts TCS, became effective on 16 May.
Currently, the TCS rates range from 0.5% to 5%.
To address the concerns and provide clarity, the finance ministry has issued a set of clarifications regarding the enhanced TCS rates that will be implemented from 1 July.
According to the budget announcements, remittances made for tour packages and other foreign remittances (excluding education and health spending covered under LRS) will attract a 20% tax starting from 1 July, up from the current rate of 5%.
Credit card usage during foreign visits is now covered under the LRS, which has an annual cap of $250,000. Any amount exceeding this cap requires permission from the Reserve Bank of India (RBI).
The finance ministry highlighted that certain individuals had exceeded the foreign remittance limit under the LRS due to the exemption given to credit card usage abroad.
To ensure uniformity and prevent bypassing of LRS limits, the ministry stated that the differential treatment between debit cards and credit cards needed to be eliminated. In the fiscal year 2023, LRS remittances amounted to over $24 billion, with more than half of this attributed to overseas travel.
In terms of the new tax rates, the ministry clarified that lower rates of TCS would apply for foreign visits related to education or medical treatment.
Education-related remittances made out of loans will be subject to a 0.5% TCS, while remittances not made out of loans will face a 5% TCS, both subject to a threshold of ₹7 lakh.
For remittances covering travel and incidental expenses related to education and medical treatment, the TCS rates applicable to education and medical treatment remittances, respectively, will apply. The ministry stated that a detailed clarification on these rates will be issued separately.
One relief provided to employees on overseas assignments is that expenses incurred during business visits will be treated as outside the LRS.
The inclusion of credit card payments within the LRS limits will likely discourage people from using credit cards for foreign expenses. This may lead individuals to explore informal avenues to obtain foreign exchange, creating potential challenges for the formal financial system.
The implementation of a 20% tax collected at source (TCS) on credit card spend during overseas travel will have significant implications for Indian travelers.
While education and medical treatment-related visits will be subject to a lower tax rate, other credit card expenses will be taxed at the higher rate. The new regulations aim to ensure uniformity in the treatment of debit and credit cards under the liberalized remittance scheme (LRS) and prevent individuals from exceeding the foreign remittance limits.
However, concerns have been raised about the potential cash flow issues and the impact on credit card usage during foreign visits.
As the regulations come into effect on 1 July, individuals and professionals traveling abroad will need to navigate these changes and plan their finances accordingly.
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