Imagining your upcoming international travels? Hold on tight since a few changes in the air could make your journey a little more expensive.
Recently, the Finance Ministry notified the new rules under FEMA, which said that credit card spending outside India will be covered under LRS (Liberalized Remittance Scheme).
This news has spread like wildfire, with everybody discussing it, and wondering about why the government has imposed such a high tax on credit card transactions abroad.
Don’t worry. Let’s understand in simple words so that it’s easier for you to plan your future international travels.
What does 20% TCS applicable on international credit cards mean?
On May 16, the Union Finance Ministry announced that debit/credit card payments made overseas/abroad would now be subject to a hefty 20% tax collected at source (TCS). This means you need to be ready to spend some extra amount of money on your international trips from 1st July 2023 onwards.
Until now, credit card spending was not included under the LRS. Debit cards, forex, and bank transfers were under the purview of the LRS. With the recent announcement, credit card payments will also be under the purview of the LRS Scheme, as a result, a resident can remit money abroad up to a maximum of $2.5 lakh per annum without the authorization of the central bank.
Here’s the twist. With so much buzz around, the Finmin announced relief from TCS for payments up to ₹7 lakhs per annum.
Example 1: Let’s say you travel to France and buy a packet of candies by swiping your credit card. It costs you 2 euros (₹180 approx). Since the amount is less than 7 lakhs, TCS would not be applicable.
Example 2: When you swipe your card for payment in a foreign currency for ₹8 lakhs, you’ll end up giving the government an extra ₹1,60,000 immediately. When filing your return, you can claim the refund of TCS.
This is because the government has started tracking your spending and asked the seller to collect the tax and deposit directly to the government.
It’s kind of an expense tax, than income tax!
What’s the impact?
This move will impact mostly business travelers and tourists who will now have to plan their travel and budget by keeping aside an additional 20% of their money.
Clearly, the winner is the government. For them, it is a bonanza.
Now the government will be able to keep all of this money. Your money will be tied up until you adjust it against your tax liability when you file your tax returns.
The decision will also lead to a compliance burden of filing ITR, with a revenue boost for the government.
Any international credit card payment exceeding ₹7 lakhs in a year, will now attract TCS at 20% starting 1st July 2023, if it is not meant for purposes of education or medical treatment.