The Reserve Bank of India (RBI) has extended the coverage of its liberalised remittance scheme (LRS) to include spending in foreign currency through international credit cards (ICC). This means that residents can now remit funds abroad, up to a maximum of $2.50 lakh per annum, without the authorisation of the central bank, regardless of whether the expenses are for personal or business purposes. However, this will result in a Tax Collected at Source (TCS) impact.

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It is worth noting that in the Union Budget 2023, the government announced that international credit card expenses would be subject to a higher TCS rate of 20 percent, effective from July 1.

While the expansion of the LRS is expected to aid in the monitoring of high-value overseas transactions, the imposition of a 20 percent TCS has become a popular topic of discussion on social media.

Here's an FAQ on new credit card LRS rule and the TCS changes:

First Published:May 18, 2023 12:32 PM IST

International credit card usage new rule: LRS limit, 20% TCS changes and other questions answered

What is LRS scheme?

Under the LRS scheme, the RBI allows residents to spend funds abroad up to the specified ceiling for investment and expenditure, including travel, education, medical treatment and buying securities and physical assets.

However, all other transactions which are otherwise not permissible under FEMA and those in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty are not allowed under the scheme.

How will LRS changes in credit cards impact users?

Until now, a resident Indian’s overseas use of credit cards during foreign travel was excluded from the LRS limit.

However, after the changes, $250,000 cap will be provided to remit abroad in a year.

According to Shardul Amarchand Mangaldas & Co Partner Yogesh Chande, the changes will tighten the usage of international credit cards for making payments by a person towards meeting expenses while such person is on a visit outside India.

With this, foreign travel will incur greater expenses.

How high TCS rate on international credit cards will affect consumers?

The Union Budget 2023-24 hiked TCS rates to 20 percent, from 5 percent currently, on overseas tour packages and funds remitted under LRS (other than for education and medical purposes).

The new tax rates will come into effect from July 1, 2023.

The imposition of a 20 percent TCS will increase the immediate total expenditure incurred by individuals on their travel.

For example: Let's assume that Mr X is booking a family tour package to a foreign country and the trip costs Rs 3 lakh.

Now, if he uses his credit card to purchase the package, he will have to spare an additional Rs 60,000 with TCS changes.

All other payment methods such as transferring money from one bank account to another will also be under LRS scheme.

According to KPMG India's Sunil Badala, the changes will not only impact individuals, but also merchants.

Will TCS provisions apply to pre-loaded forex cards too?

Transactions between two bank accounts, through debit and forex cards also come under the LRS scheme.

However, experts say that more clarity is required on how TCS will apply to money remitted abroad via forex cards.

Will all online payments made in foreign currency attract 20% TCS?

From July 1, transactions done through credit cards only will attract TCS at 20 percent.

Are these rules applicable to ICC only or all international transactions using credit cards?

It's applicable only to international credit cards.

These cards work outside Indian network only.

Visa and MasterCard have the greatest global reach making them the network of choice for international credit cards.

On the other hand, Indian credit card can also be used for cash withdrawal overseas, but then it is obviously going to cost more.

What will be the time period for receiving TCS refunds?

Taxpayers can claim the '20% TCS' at the time of Income Tax Return (ITR filing) as it is a direct tax levy.

However, experts say that this may result in cash flow issues for some taxpayers.

The fund will be locked until the time refund is done after processing of ITR.

Additionally, experts point out that those not having an income will not get the refund too.

"Majority of the population aren’t taxpayers and government will incur extra cost to refund money," said Transaction Square's Girish Vanvari while talking to CNBC-TV18.