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February 20, 2024

Govt clarifies payments abroad for up to ₹7 lakh will not be taxed

Govt clarifies payments abroad for up to ₹7 lakh will not be taxed

The government issued a clarification on Friday stating that a 20% Tax Collection at Source (TCS) will be applicable only to overseas credit card transactions exceeding 7 Lakh.

20% Tax Collection at Source for credit cards online transactions rule update
20% Tax Collection at Source for credit cards online transactions rule update

An official statement addressed concerns about the applicability of TCS to small transactions under the Liberalized Remittance Scheme (LRS) from July 1, 2023. To eliminate procedural ambiguity, it was decided that individual payments up to 7 lakh per financial year made using international debit or credit cards would be excluded from the LRS limits and therefore not subject to TCS.

The government order also confirmed that the existing beneficial TCS treatment for education and health payments would continue. Furthermore, any other necessary changes to the Rules (Foreign Exchange Management (Current Account Transactions Rules), 2000) would be issued separately.

Previously, on Thursday, the government announced the inclusion of credit card transactions in foreign currency under the LRS and the implementation of a 20% TCS starting July 1, 2023. These transactions were not previously considered part of the LRS framework. (Also Read: Experts criticise decision to tax credit card usage in foreign countries)

20% TCS on overseas credit card transactions above 7 lakhs: All you need to know

Credit card transactions in foreign currency, which were previously not considered part of the LRS, are now included within its scope. The LRS framework allows Indian residents to send money abroad up to a specific limit (currently $250,000 per financial year) for certain purposes like education expenses, travel, and investments.

Under the updated regulations, a 20% TCS is applied to these credit card transactions if the amount is more than 7 lakhs. TCS is a tax collected directly from the transaction itself instead of relying on the taxpayer to pay it later. The entity receiving the payment collects a percentage of the transaction amount as tax and submits it to the government.

Understanding the updated credit card regulation with examples

Assume you are travelling to the United States from India and using your credit card to pay for expenses exceeding 7 lakhs (except expenses like health, education). These are credit card transactions in foreign currency since you are using your credit card to make payments in US dollars rather than rupees.

The new tax will also apply to foreign currency transactions done online to foreign merchants. If you make online purchases from international websites and pay with your credit card in a foreign currency such as US dollars or euros, those transactions are classified as credit card transactions in foreign currency and will attract 20% TCS if the amount exceeds 7 lakhs.

In both circumstances, the credit card provider will convert the foreign currency amount into rupees at the time of the transaction using the current exchange rate.

The new rules under LRS aim at bringing parity between the usage of debit and credit cards in the foreign land. The move will essentially require persons undertaking transactions through international credit cards during their travels abroad to be conscious of the restrictions on transactions.

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