Govt revises TCS norms in some respite to Indian credit card users

The Ministry of Finance has made important changes to the rules regarding the collection of taxes on overseas transactions under the Liberalised Remittance Scheme (LRS). These changes, which were supposed to kick off on July 1, 2023, have been postponed to October 1, 2023, said a ministry press release.

The government has decided to temporarily stop the implementation of charging up to 20% TCS (tax collected at source) on foreign money transfers made through credit cards, which it announced in May 2023.

The purpose of these modifications is to address concerns from different groups of people and give banks and card networks enough time to update their IT-based solutions to comply with the new rules.

People can claim a refund of the 20% TCS as part of the I-T filings at the end of the financial year.

Exclusion of international credit card transactions from LRS

• To make things easier for banks and card networks to adjust their systems, the government has decided that payments made with international credit cards while Indians are abroad will not be considered under the Liberalised Remittance Scheme (LRS).
• This means that even when the new rules take effect on October 1, 2023, one won't have to pay Tax Collection at Source (TCS) for the following transactions:

Threshold limit for TCS on LRS payments

• The upper limit of Rs 7 lakh per year per person for Tax Collection at Source (TCS) on all types of payments made through the Liberalised Remittance Scheme (LRS) will be restored.
• This means that no TCS will be applicable for the first Rs 7 lakh that a person sends abroad under the LRS.
• If the amount exceeds this limit, the TCS rates will depend on the purpose of the payment.
• For education remittances financed by education loans, a TCS of 0.5% will be charged.
• For education and medical treatment remittances, the TCS will be 5%.
• For other types of remittances, a TCS of 20% will be applicable.
• The TCS rate for purchasing overseas tour packages will remain at 5% for the first Rs 7 lakh spent by an individual in a year.
• However, any amount spent above that will attract a TCS of 20%. These revised TCS rates for tour packages will start from October 1, 2023, along with the other changes in the TCS rules.

When will the new rates kick off?

• The planned increase in TCS rates, which was supposed to happen on July 1, 2023, will now start on October 1, 2023.
• This means that the current rates will continue to apply until September 30, 2023. The rates mentioned before the amendment will still be in effect during this time.

Earlier announcement

• In the Union Budget 2023, Finance Minister Nirmala Sitharaman announced an increase in the TCS rate from 5% to 20% for transactions made under the Liberalised Remittance Scheme (LRS), making sending money abroad through bank transfers, Forex cards, property purchases, and tour packages subject to a 20% TCS, except for education and medical purposes.

• Additionally, credit card transactions, which were previously excluded from the LRS, were made to pay 20% TCS as well. This means that any payment made with a credit card for flights, hotels, or food expenses abroad will be subject to the 20% TCS.
• Furthermore, the notification stated that individuals wishing to spend over $2,50,000 (approximately over Rs 2 crore) will need to obtain prior permission.

What is the Liberalised Remittance Scheme (LRS)?

• The Liberalised Remittance Scheme (LRS) was introduced by the Reserve Bank of India in 2004 to make it easier for people living in India to send money abroad for different purposes.
• Each financial year, from April to March, individuals can freely send up to $2,50,000 (around Rs 2 crore) for things like travel, education, or investments without needing special approvals.
• This scheme is not available for companies, partnerships, family trusts, and similar entities.
• There are no limits on how many times someone can send money using the LRS, but once they reach the limit of $2,50,000 in a year, they have to wait until the beginning of the next financial year to send more money.
• This scheme aims to provide individuals with the freedom to send money abroad for their needs while maintaining certain guidelines and limits.

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What is TCS on credit cards?

• When Indians use credit cards to make payments in foreign currencies, the government collects a certain percentage of tax from that transaction. This tax is called Tax Collection at Source (TCS).
• The credit card company or payment processor collects the tax amount directly from the user.
• The main reason for collecting this tax is to keep track of how much people spend abroad and make sure they accurately report their income from foreign transactions.
• The tax rates and limits can change over time, and there are some categories like education and medical expenses that may have different tax rates or exemptions.
• Also, there are certain limits where payments made with international debit or credit cards may not be subject to this tax.