Travelling abroad soon? Don’t leave without knowing the new TCS rule applicable on Credit Cards, forex cards, debit card transactions, and currency purchases.
There is some unfortunate news for travellers who use international Credit Cards while abroad. The Reserve Bank of India (RBI) has included international Credit Card transactions under the Liberalised Remittance Scheme, and as a result, every dollar spent abroad will now incur a 20% Tax Collected at Source (TCS).
The Central government has introduced amended rules under the Foreign Exchange Management Act (FEMA), which means that starting from July 1, 2023, international Credit Card transactions will need to comply with the RBI’s Liberalised Remittance Scheme.
Previously, individuals could use international Credit Cards overseas without being concerned about the LRS and TCS. However, under the new rules, every transaction made with an international Credit Card will be subject to the fixed TCS rate specified by the LRS. It is worth noting that different TCS rates apply to various types of transactions, such as sending money for education or medical expenses versus investing abroad. The absence of a threshold limit further complicates matters for international card users, as the 20% TCS will apply to all international card expenses.
Additional Reading: Are You Financially Ready to Travel Abroad?
The direct consequence of this new 20% TCS rule is that travellers will need to have additional funds available, as their Credit Card limit must be higher. For instance, if you were planning to spend USD 2500 on travel, accommodation, and other expenses while abroad, and assuming the exchange rate is ₹84 per USD, you would currently require approximately ₹2 lakhs (excluding conversion charges and GST) to purchase the necessary USD. However, after July 1, you will need to pay an additional 20% as TCS. This means you would have to pay ₹40,000 more to acquire the same USD 2500.
Adhil Shetty, CEO, BankBazaar.com, says, “TCS has been applicable on foreign remittances since 1961, and the LRS since 2004. Over the years, there have been several changes in how much TCS is deducted and in what situation. Prior to this amendment, all forex instruments, foreign currency, forex cards, debit cards, etc., attracted a TCS. The only exception was Credit Cards. So, to remove the differential treatment between debit cards and Credit Cards and to capture the total expenditures under LRS, Credit Cards have also been brought into the ambit of TCS on LRS.”
The Credit Card company will collect the tax and include it in the cardholder’s statement. It’s important to note that the 20% TCS rule applies not only to Credit Cards but also to forex cards, debit card transactions, and currency purchases.