Understanding the 20 percent Tax on Credit Card Expenses for Overseas Travel in India
In a recent development, the Indian finance ministry announced amendments to the foreign exchange management rules, introducing a 20% tax collected at source (TCS) on credit card expenses incurred by Indians during overseas travel. However, it's important to note that expenditures related to education or medical treatment will be subject to a lower tax rate. This new tax will be implemented starting from 1 July.
Under the revised regulations, credit card issuers will collect the tax when the bill is settled in Indian rupees. This tax amount can then be adjusted against the cardholder's tax liability during the tax payment process. While salaried individuals will need to wait until filing their returns to benefit from this adjustment, professionals can use this credit to offset their quarterly advance tax liability.
Experts have pointed out that the introduction of the TCS requirement may pose a cash flow challenge for individuals traveling abroad. Furthermore, the inclusion of overseas credit card usage within the purview of
the Reserve Bank of India's liberalized remittance scheme (LRS) means that it will now attract TCS. This change became effective from 16 May. Currently, TCS rates range from 0.5% to 5%.
The recent clarifications provided by the finance ministry cover various aspects related to the enhanced TCS rates, which will come into effect on 1 July. According to the budget announcements, any foreign remittances for the purchase of tour packages or other purposes, excluding education and health expenditures covered under LRS, will attract a 20% tax starting from 1 July, up from the current 5%. It's worth noting that credit card usage during foreign visits is now included under LRS, which has an annual cap of $250,000. Any amount exceeding this limit requires prior approval from the Reserve Bank of India (RBI). On the other hand, debit card usage during foreign visits was already covered under LRS.
The finance ministry stated that it had observed some individuals surpassing the foreign remittance limit
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under LRS due to the exemption provided for credit card usage abroad during travel. To ensure uniformity and comprehensive monitoring of expenses under LRS, the distinction between debit cards and credit cards needed to be eliminated, according to the ministry. This measure is also aimed at preventing individuals from bypassing LRS limits for prudent foreign exchange management. The ministry further revealed that in the financial year 2023, LRS remittances exceeded $24 billion, with more than half attributed to overseas travel expenses.
The clarification issued by the ministry emphasizes that lower TCS rates will be applicable when the foreign visit is for educational or medical purposes. For education-related remittances made out of loans, the TCS rate will be 0.5%, while for non-loan remittances, it will be 5%, both subject to a threshold of ₹7 lakh. Similarly, TCS rates applicable to remittances for travel and incidental expenses related to education and medical treatment will align with the rates for education and medical treatment
remittances, respectively. A detailed clarification on these rates will be released separately.
It's important to note that there is one relief for employees on overseas assignments. Expenses incurred during business visits covered by the employer will be treated outside the purview of LRS.
Tax and regulatory services partner at EY, Sudhir Kapadia, commented that the recent decision to include credit card payments made abroad within LRS limits may lead individuals to explore informal channels to obtain foreign exchange and reduce their reliance on credit cards.
In conclusion, the implementation of the 20% TCS on credit card expenses for Indians traveling overseas starting from 1 July will have significant implications. The exemption for education and medical purposes, the potential impact on cash flow, and the integration of credit card usage into the Reserve Bank of India's remittance scheme are key aspects to consider. Understanding these changes is crucial for individuals planning to travel abroad and manage their finances effectively within the new tax framework.