Impact on Credit Card Spending
What’s the story? 🤔
The finance ministry has made amendments to the Foreign Exchange Management Act (FEMA), specifically bringing international credit card transactions under the purview of the Liberalised Remittance Scheme (LRS). These changes have important implications for individuals using credit cards for transactions in foreign currency.
How does it impact!?
✈️ Integration of Credit Card Payments into LRS: Going forward, credit card spending in a foreign currency will be included in the annual limit of the LRS, which currently stands at $2,50,000 per person. This means that credit card transactions will now be subject to the regulations and restrictions outlined by the LRS. Additionally, these transactions will be subject to tax collected at source (TCS).
✈️ Changes in LRS Rules: The Ministry of Finance has issued a notification regarding the amendment of rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. This change eliminates the special privileges that international credit cards previously enjoyed and places them on equal footing with other money transfer instruments. However, payments made through funds held in RFC (Resident Foreign Currency) accounts in Indian banks are exempt from this rule.
✈️Impact on Individuals: It is important for individuals who use international credit cards for transactions outside India to be aware of the restrictions listed in Schedule III of the Rules. These restrictions include monetary caps imposed on specific types of transactions. Prior consent will be required only if these caps are breached, with certain limits considered reasonable.
✈️ TCS for Foreign Remittances: As part of the Budget 2023, the TCS for foreign remittances under the LRS has been raised from 5% to 20%, except for education and medical purposes. This change, effective from July 1, 2023, has financial implications for individuals sending money abroad. Remittances made for foreign education through an education loan paid abroad currently attract a TCS of 0.5% beyond Rs 7 lakh. However, if the source of funding is not an education loan, remittances for educational purposes will also be subject to TCS.
We would like to emphasize that TCS is not an additional tax but an adjustable component against an individual’s total income tax liability. However, it’s important to note that an upfront TCS of 20% on tour packages may increase cash outflow. Individuals without sufficient tax liability to offset the TCS may need to file for a refund, which can take several months and impact cash flow.
We encourage you to stay informed about these regulatory changes and take the necessary steps to comply with the revised guidelines. For detailed guidance specific to your situation, we recommend consulting with appropriate professionals.