Explained: How you can minimise the impact of 20% TCS on foreign trips

Earlier, individuals could use their credit cards overseas without having to worry about the Reserve Bank of India’s Liberalised Remittance Scheme (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. But after facing backlash, the Finance Ministry clarified on May 19, 2023, that TCS will no longer be levied on any payments made by individuals using international debit or credit cards, as long as the amount is within Rs 7 lakh per financial year.

Any payment beyond the Rs 7 lakh limit, will attract TCS of 20 percent.

“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,” said Adhil Shetty, BankBazaar.com’s chief executive officer (CEO).

TCS vs TDS

Let us first understand the difference between tax deducted at source and tax collected at source.

TDS is deducted by your employer on your salary, or by your bank on the interest income. TCS is collected by the seller at the point of sale.

“TDS relates to income and is deducted by the income payer, while TCS pertains to expenditure and is deducted by the seller when availing notified products or services. For instance, TCS is applied on the purchase of motor vehicles over Rs. 10 lakhs in value. TCS is not required when goods are used for manufacturing, processing, or producing other products. Late filing of TCS returns incurs a fee of Rs 200 per day, not exceeding the TCS amount,” said Abhinav Soomaney, managing partner at CryptoTax International Pvt Ltd.

Remittance and LRS

Under LRS, people can send up to $250,000 per financial year from India to other countries for different purposes like education,  travel, medical treatment, investments, and even gifting money to family members abroad.

Earlier, overseas use of international credit cards was not included in the overall limit under LRS. It covered debit cards, foreign currency exchanged, traveller cheques, forex cards, and bank transfers. However, with the recent amendments, credit card transactions while travelling abroad will fall under LRS. The credit card company will collect the tax and include it in the cardholder’s statement

“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,” said BankBazaar.

Exemptions

Expenses incurred by an employee on a business visit, when such expenses are borne by the employer, do not come under LRS and are exempt from the 20 per cent TCS.

The new provision will also not impact payments made for education and medical purposes. The last Union Budget proposed maintaining 5 per cent TCS for foreign remittances exceeding Rs 7 lakh towards education and medical treatment. It said there will be no change in the 0.5 per cent TCS on foreign remittances exceeding Rs 7 lakh towards education through loans from financial institutions.

TCS will also not apply on the payments for purchase of foreign goods/services from India such as newspapers or online streaming services.

Why the change

“Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000. The differential treatment between Debit cards and Credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits….Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes. TCS is like TDS, it is NOT a final burden of tax.. One can claim it as refund while filing ITR,” said the Finance Ministry in a notification on May 16.

The government said the move would impact only tour travel packages, gifts to non-residents and domestic high net-worth individuals investing in assets such as real estate, bonds, and stocks outside India.

The Finance Ministry has exempted payments by individuals using their international debit or credit cards up to Rs 7 lakh per financial year from the 20 per cent levy. Point to note: This threshold limit is only for debit and credit cards. It is not applicable on forex cards and cash exchanges.

The Rs 7 lakh limit on cards is not applied for each individual card

The monetary exemption limit of Rs 7 lakh is not to be applied for each individual credit or debit. Thus, even if the total amount spend on each card is less than Rs7 lakh, TCS will apply if the aggregate amount spent using all the cards is more than Rs 7 lakh.

“It is quite likely that the banks may collect additional 20% towards TCS from the card holders by including the same in the card statements. Thus, the TCS amount is likely to be included in the periodic statements generated and issued by the banks. It will also impact the overall spending limits on such cards,” said S. Vasudevan, Executive Partner at Lakshmikumaran and Sridharan Attorneys.

What if someone spends Rs 4 lakh each using different credit cards of different banks?

Compliance will be challenging and there is not much clarity on this. A government notification is needed as how TCS will function on a practical level is still a mystery.

“Banks issuing credit cards will be responsible for collecting 20 per cent TCS from July 1. This may be difficult for banks to track, and they may have to rely on declarations by the credit card users themselves as to the nature of the payment. They will also have to build an IT system to verify particulars of payment, capture this data and ensure compliance in a timely manner,” said Neeraj Agarwala, Partner at Nangia Andersen India.

Call for common platform

“There needs to be a common platform for credit card companies to be able to monitor international transactions incurred by an individual on different cards. In the absence of the same implementation shall remain a challenge. The onus of compliance in this situation is upon the bank or the credit card company, therefore it is unlikely that any action can be taken against individuals. That said, issuers will be keen to avoid such penalties and may implement harsher than required measures that may end up blocking credit for a large swathe of card holders,” said Pallav Pradyumn Narang, partner at CNK.

“Cards on the same PAN shall be treated as single and hence the possibility of using multiple cards to enjoy multiple limits is shot in the foot. The exemption threshold should be read harmoniously in spirit and accordingly the exemption limit shall be on an aggregate basis encompassing all credit and debit cards. Practically, it is a matter of time before we see international credit cards and international debit cards being directly linked to PAN in order to track LRS limits/ exemption threshold,” said Keshav Singhania, head–private client, Singhania & Co. TCS is collected upfront. You can buy a forex card and you’re allowed to keep around $2,000 with you, but then you have to pay the TCS from the entire amount, irrespective of whether you use it in one or multiple trips.

The threshold relaxation of Rs 7 lakh per financial year from TCS is only for overseas spending using international credit or debit cards. The relaxation will not be applicable on remittances made from India for tour bookings . If one is booking a tour package for Spain for Rs 5 lakh and pays for it in India, the Rs 7 lakh exemption is not applicable. But for spending on overseas shopping, travel and eating with international cards and debit cards, the exemption is applicable.

“Contrary to popular belief, current account transactions undertaken on ICC (international credit card) in India (say booking an international trip) was always included in the ambit of LRS. To reiterate, payments on a foreign e-commerce website through an ICC, wherein the individual was located in the country itself was and will continue to be included in the LRS cap without any threshold limits,” said Singhania.

How does one reduce this TCS burden while travelling abroad?

In case of family vacations, since each resident individual including minor gets his/ her own LRS limits and therein aggregate card spends up to Rs 7 lakh in a financial year, family members can distribute the card spends across various family members in a manner which ensures that threshold limit for each individual is not breached, advised Singhania.

Alternatively, families may explore alternatives wherein the expenditures are incurred by their friends and family abroad and have them reimbursed in cash, he added.

“To circumvent TCS on an international trip, individuals can book flights and hotels in separate transactions and/or use multiple cards for each booking, keeping the amount below the Rs 7 lakh threshold,” said Soomaney.

In short, book different components of your tour separately such as flight tickets, hotels and sightseeing directly rather than purchasing a complete package.

For example: if a person books a trip to Maldives with the help of a travel agent and his total package costs Rs 8 lakh, 20% TCS will be collected by the agent. However, if that same trip is booked personally and on separate platforms, Rs 3 lakh on flights and Rs 4 lakh on stay, no TCS will be collected.

You can also divide your pay between debit and credit cards as opposed to using a forex card.

Even a single rupee transaction of loading foreign currency onto a forex card would attract 20 per cent TCS without any exemption limit. But if someone spends Rs 5 lakh on a debit card, and then Rs 4 lakh on a credit card internationally in a given financial year, then of the total Rs 9 lakh, only Rs 2 lakh will attract a TCS of 20 per cent.

When using an international credit card for international transactions, users  must claim credit for the tax payment when filing annual income tax returns in India.

TCS is not an additional tax, it is simply a collection of tax on your behalf, i.e. an advance tax paid by you. While you will have to pay more for international travel upfront, you can claim the tax back through your  annual tax statements

TCS credit is available to be adjusted against actual tax liability to be payable at the end of the year. In case of no such tax liability, one can claim a refund at the end of the year.

“The downside to the upfront TCS is the opportunity cost with an ever increasing cost of capital. Quarterly TCS returns once filed by the authorised bank, then TCS amounts would reflect in Form 26AS of the Indian resident individual.

‘Regressive policy’ allegation

Also, there is no procedure to apply for exemption from TCS provisions in case of remittances under LRS,” explained Singhania.

Several experts on condition of anonymity termed the government’s move as regressive as many would opt to ask their friends and family abroad to incur expenses on their behalf, which they would then reimburse by transferring the equivalent amount into their Indian banks.

“TCS on LRS is not only a regressive policy in precept but ham-fisted in practice. It has the potential to create a black market in forex for travel and defeat the government’s aim to curb the country’s illicit cash economy,” said Vivek Siddharth Ojha, a Supreme Court lawyer.