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The 20% TCS impact on international credit cards

Dreaming of your next adventure abroad? Well, hold on tight because there are a few changes in the air that could make your trip a tad pricier.

tcs on credit card

On May 16, the Union Finance Ministry announced that credit card payments made overseas would now be subject to a whopping 20% tax collected at source (TCS). 

The news spread like wildfire, igniting a storm of tweets, memes, and general uproar. People are scratching their heads, wondering why the government would levy such a steep tax on credit card transactions made abroad.

But after facing a backlash from the Finance Ministry, made the clarification, starting May 19, 2023, TCS will no longer be levied on any payments made by individuals using their international debit or credit cards, as long as the amount stays within Rs 7 lakh per financial year. 

That’s right, it’s time to breathe a sigh of relief to family and leisure travellers!

However, don’t worry. Let’s break it down for you in simple terms so that you can understand what this means for your future travel plans.

First, let’s get familiar with some acronyms: TCS , TDS and LRS.

What’s the basic difference between TDS & TCS?

Before diving into the details, let’s first understand the basic difference between Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). TDS is deducted by your employer or bank on your salary or interest income, respectively. 

On the other hand, TCS is collected by the seller at the point of sale. So while your employer deducts TDS from your salary, and in the case of foreign remittances, the bank will collect TCS.

What’s the Difference Between
TDS – Tax deducted at sourceTCS- Tax collected at source
Tax collected directly from the source of incomeCollected to prevent tax evasion on specific goods like liquor & timber.
Applicable for salaried individualsApplicable for sellers
Deducted by the employer directly from the individual’s salaryCollected by the seller from the buyer on the purchase of an item.
Payable to the government by the employerPayable to the government by the seller
Deducted when income exceeds <2.5 LakhsDeducted on goods traded directly & not utilized to manufacture other goods

Understanding Remittance and Liberalised remittance scheme (LRS)

Remittance: Sending money abroad

Remittance is when money is sent from one person to another, often from one country to another, for various reasons like helping family members with expenses, rent, school fees, and more. 

The Liberalised Remittance Scheme is a set of rules that allow people to send a certain amount of money from India to other countries for different purposes. It’s like a limit on how much money can be sent abroad. 

Under the LRS, you can remit up to USD 2,50,000 per financial year for things like education, travel, medical treatment, investments, and even gifting money to family members abroad.

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What’s the deal with the 20% TCS on credit card transactions?

You know those international trips you’ve been dreaming of? Well, get ready to shell out some extra cash because starting from July 1, 2023, the Indian government has introduced a 20% Tax Collected at Source (TCS) on all credit card transactions made internationally. 

That’s right, every time you swipe your credit card abroad, a hefty 20% tax will be collected.

But, what does this mean for you?

Until recently, credit card spending in foreign countries wasn’t included under the LRS. The LRS covered debit cards, forex cards, and bank transfers, but not credit cards. However, with the recent amendments, credit card transactions while travelling abroad will now fall under the LRS.

Let’s say you booked a trip to Spain for Rs. 10 lakh using your credit card. With the new TCS, you will have to spend an additional Rs. 2 lakh, making the total cost Rs. 12 lakhs. Ouch! That’s a significant dent in your travel budget.

To ensure absolute clarity, the authorities have made it crystal clear that any payments made by individuals using their international debit or credit cards, within the Rs 7 lakh per financial year limit will be excluded from the LRS limits.

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Closing the loophole

Now, here’s where it gets interesting. There was a little loophole in the system that allowed credit card transactions for foreign visits to escape the LRS and TCS provisions. Sneaky, huh?

But don’t worry, the RBI wasn’t going to let that slide. They deleted the rule that permitted credit card transactions to bypass LRS. Now, regardless of the mode of payment, the LRS and TCS provisions apply. The banks are now tasked with monitoring and tracking these credit card spends to ensure compliance.

Behind the scenes: Government’s perspective

The government claims that implementing the 20% TCS will enable them to keep tabs on high-value overseas transactions. However, many Twitter users swiftly fired back, arguing that the previous 5% TCS rate was already serving this purpose effectively. So, why the sudden jump to 20%?

S.NoType of remittancePresent rate*Proposed rate*
(i)For the purpose of any education, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80B.0.5% of the amount or the aggregate of the
amounts in excess of Rs. 7 lakh.
No change.
(ii)For the purpose of education, other than (i) or for the purpose of medical treatment.5% of the amount or the aggregate of the amounts in excess of Rs. 7 lakh.No change
(iii)Overseas tour package5% without any threshold limit.20% without any threshold limit.
(iv)Any other case5% of the amount or the aggregate of the amounts in excess of Rs. 7 lakh.20% without any threshold limit.

Is there a silver lining?

Fear not, fellow travellers, for there is a glimmer of hope. While filing your annual Income Tax Return (ITR), you can claim back the 20% TCS deducted from your credit card payments made abroad. 

But here’s the catch—people are not thrilled about the new tax changes. They believe it has only made foreign trips more expensive and cumbersome.

The impact and implications: What you need to know

Now that you’re up to speed on the changes, let’s explore the key points and implications:

  • From May 16, 2023, credit card transactions made by individuals abroad will be subject to the LRS limit of $2,50,000. Going over this limit will require prior approval from the RBI.
  • The TCS rate will differ depending on the purpose of the remittance. 
  • It’s essential for banks to monitor and track these credit card spends to ensure compliance with LRS and TCS regulations. 
  • While this move aims to strengthen RBI’s control over foreign remittances, it may result in higher tax outgo for many individuals.
  • There’s still some uncertainty about how tax authorities will differentiate between online international purchases and credit card spending abroad. Such as subscriptions, US based companies services etc We hope the government provides clarity on this soon!

Ah, the allure of credit cards and their tempting reward points. Finance influencers had us all excited about the perks, but guess what? 

Reality just slapped us in the face. Using credit cards for international travel now comes with a hefty price tag. It’s a tough pill to swallow, but hey, at least we’re learning the hard way to be more cautious with our spending choices.

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Hunny Meghani

A curious mind, a love for writing, and a passion for all things finance - that's me in a nutshell. Whether I'm exploring the latest stock market trends or diving into the nitty-gritty of personal finance, marketing, and AI. I'm always on the hunt for the next big story.

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