Banks seek delay on taxing overseas card spends: How 20% TCS impacts you

Indian banks are requesting more time to prepare for the new rule taxing international credit card transactions under the LRS scheme.

Banks in India have reportedly requested a one-month extension to comply with a new rule taxing international credit card transactions. 

The rule:

The Government of India recently introduced a significant change that directly impacts individuals' overseas spending. Under the newly amended Foreign Exchange Management Act (FEMA), all international credit card transactions made in foreign currency now fall under the Liberalised Remittance Scheme (LRS). This alteration introduces a set of rules that need to be understood by Indian residents who frequently use international credit cards for their purchases.

"Previously, Indian residents could freely remit up to $2,50,000 (approximately Rs. 2 Crores) out of India in a financial year without requiring any RBI approval. This amount was utilised for various purposes such as travel, education, medical treatment, and more. However, there was no specific limit for purchases made using international credit cards. The recent amendment now includes all foreign currency transactions, including those made with debit cards, credit cards, or forex cards, within the overall limit of $2,50,000 in a financial year (April to March). If this limit is exceeded, approval from the RBI becomes necessary. The transactions falling under the LRS are subject to Tax Collected at Source (TCS), which implies that the tax will be collected in advance at the time of making the payment itself," explained ClearTax.

What changed?

Before July 1st, 2023, a 5% tax collected at source (TCS) applied to international credit card transactions exceeding a certain limit. Now, the TCS rate has jumped to a significant 20% for most transactions.

What's the limit?
There's a limit of USD 250,000 per year for international spending using credit cards. However, the 20% TCS doesn't apply to your entire spending. The government listened to concerns and provided some relief. You will only be charged the 20% TCS on expenses exceeding Rs 7 lakh (approximately $9,000) annually. So, if your total international spending stays below Rs 7 lakh, you'll continue to pay the previous 5% TCS rate.

Exceptions for Medical and Education:

There's a further benefit for medical expenses and education costs. Up to Rs 7 lakh spent on these categories enjoys a lower TCS rate:

• 5% TCS for medical and education expenses.
• 0.5% TCS for education expenses paid with an education loan.

How does the tax work?

The bank deducts the TCS amount at the time of the transaction. This might seem like a loss initially, but there's a way to get it back.

Claiming the Tax Back:

• The TCS amount deducted by the bank is credited to your account.
• You can use this credit to reduce your quarterly advance tax payments or your final annual income tax liability.

The problem that banks are now facing:

Banks are not fully prepared to implement this new rule. They argue they need more time for:

• System Calibration: Their systems need to be updated to track and report these international credit card transactions under the LRS scheme.
• Customer awareness: Banks need to inform their customers about the new rule and how it affects their spending habits.
• Staff Training: Bank staff need proper training to handle LRS-related inquiries and transactions involving international credit cards.

Current situation:

• The government hasn't issued any final guidelines on how this new rule will be implemented.
• Banks are expecting these guidelines within the first few weeks of the new government formation.
• Banks requested a one-month extension (until June 30th, 2024) to be fully prepared.

The Reserve Bank of India (RBI) is advising banks and the Indian Banks' Association (IBA) to develop a standard operating procedure (SOP) for smooth implementation.

How does TCS impact travel?

If you spend $10,000 on a trip using your credit card, you'll initially pay a $2,000 TCS (on the amount exceeding Rs 7 lakh).

Banks might add additional charges and GST on the TCS amount.

Why the change? 

The government aims to:

• Track high-value foreign spending for transparency and prevent misuse.
• Generate revenue by collecting taxes on these transactions.

How to minimise impact of 20% TCS

• The Rs 7 lakh limit applies per person, not per card. Spreads costs among family members to avoid exceeding the limit.
• Consider having friends/family abroad pay for expenses and reimburse them later (in cash).
• Book flights and hotels separately for tours to avoid TCS on tour packages.
• Use multiple cards for transactions if needed.

Important points to remember

• TCS is not an extra tax, but an advance tax collected on your behalf.
• You can claim the deducted TCS amount as a credit or refund during tax filing.
• TCS amounts will be reflected in your Form 26AS after the bank files quarterly TCS returns.