Overseas credit card spends come under LRS, to attract 20% TCS

Using an international credit card on your next foreign trip may burn a bigger hole in your pocket after the Ministry of Finance amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000 by omitting Rule 7, which allowed unrestricted use of international credit cards for overseas trips.

The move brings credit card spends made outside India under the ambit of the Liberalised Remittance Scheme (LRS). Indian residents are allowed to remit up to $250,000 (around ₹2.06 crore) per year without any prior approval from the Reserve Bank of India (RBI). This does not include spends made in Nepal and Bhutan.

As a result of this amendment, credit card spends on foreign trips will attract 20% TCS (tax collected at source) from July 1 compared with 5% currently.

This comes months after Finance Minister Nirmala Sitharaman said that payments for foreign tours through credit cards are not being captured under the Liberalised Remittance Scheme (LRS) and they escape tax collection at source. "The RBI is being requested to look into this with a view to bring credit card payments for foreign tours within the ambit of LRS and tax collection at source," Sitharaman had said in her Budget 2023 speech.

"The Indian Government has made unequivocally clear that the Liberalized Remittance Scheme (LRS) of the RBI which limits the amount of foreign exchange transactions that an Indian resident individual can freely undertake in a financial year to $250,000, will also extend to forex transactions undertaken by such an individual when he or she uses his international credit card for making forex payments," says Russell Gaitonde, partner, Deloitte India.

"These forex payments will cover credit card transactions undertaken by the individual not only while travelling abroad, but also while being physically present in India and making forex purchases, such as online purchases," Gaitonde adds.

The new rules are aimed to check big overseas spends by high net-worth individuals.

"There is a clear attempt at bringing these transactions within the scope LRS, with the removal of the exemption previously," says Shreya Suri, partner, IndusLaw. The prior consent requirement will kick in only if these caps are breached and some of these limits are reasonably high as well, and it will have to be analysed how the industry reacts to these changes, says Suri.

Meanwhile, social media users seem annoyed by 20% TCS on credit cards.

"What a disaster. This is going to be a compliance nightmare. The TCS rule too would add to the paperwork. Lots of business-related software, hosting and IT expenses are done on personal credit cards and then reimbursed. All subject to LRS + TCS now?" tweeted Rajeev Mantri, managing director at Navam Capital.

Another Twitter user, Rahul Bajoria, said, "The government might be better off lowering the LRS limit to USD150k, than doing such shenanigans. The compliance cost of monitoring this will be prohibitive, and implied free cash flow for government. Should be seriously reconsidered."

Indians spent more than $1 billion monthly on average on international travelling during April-December 2022, according to RBI data. Outward remittances from India under the LRS for the purpose of travel stood at $9.95 billion during April-December, up from $4.16 billion during the same period of the previous year.