TCS on Using Credit Cards Abroad — What Has Changed and How Does It Affect You?

Starting July 1, 2023, using your credit card abroad will involve a cashflow hit. From July 1, there will be Tax Collection at Source (TCS) of 20% on credit card payments while travelling abroad or on foreign websites.

Essentially, when you swipe your credit card for USD 100 abroad, your credit card will be charged for USD 120. USD 100 (after adjusting for charges) will go to the merchant and the remaining USD 20 will be deposited against your PAN with the income tax authorities in India. You will be able to see such entries in your Form 26AS.  We will have to wait and see how the deduction of this extra USD 20 will be operationalized. Right at the time of swipe or later? Most likely later. We will soon find out. But you are paying 20% extra. There is a threshold of Rs 7 lacs on credit/debit card payments abroad before this TCS kicks in. More on this later.

This does not mean extra tax. This is only TCS. You can get this back.

Note this is just tax collection at source (TCS). Using a credit card abroad does not give rise to tax liability per se. So, no tax for using credit card per se. Only TCS.

What does that mean? This means you can claim back the TCS amount (paid extra) at the time of filing ITR.

Let’s consider an example. At the time of filing ITR, you figure out that you have to pay income tax of Rs 10,000 but your bank has already deposited TCS of Rs 2,000 against your PAN for using credit card abroad. Then, you must pay just Rs 8,000 (Rs 10,000 – Rs 2,000) to settle your tax bill.

However, if you are salaried (your employer already deducts the TDS, i.e.,Tax Deduction at Source) and you have no other income that’s liable to advance tax, this new rule does create cashflow mismatch. You swipe your credit card in June 2023 and incur TCS hit, but you will file the returns for FY2024 only in July 2024 (say). The refund will take another few days, weeks, or months. During such time, you must fund this cashflow mismatch yourself.

Alternatively, if you deposit advance tax, you can set off this TCS paid against advance tax liability and pay lower advance tax. Since the advance tax is paid every quarter and you don’t have to wait until ITR filing to adjust this TCS deducted, the impact of this rule is much lower on professionals or anyone who pays advance tax.

How This Worked Earlier and What Has Changed?

There are restrictions on how much money Indian residents can send abroad. Non-residents (NRIs) face much lesser restrictions and rightly so.

Indian residents can remit only up to USD 250,000 abroad per financial year. This is permitted under Liberalized Remittance Scheme (LRS). Any remittance in excess of this amount shall require RBI approval.

You can refer to Foreign Exchange Management (Current Account Transaction) Rules, 2000. Schedule III. However, there was an exception. These restrictions did not apply if you used an international credit card abroad. Refer to Clause 7 in the FEM (CAT) rules, 2000 referred above.

Note that using international debit card (swiping your debit card abroad) was always under this overall limit. Even using prepaid forex cards or forex withdrawals were subject to overall limit. Only credit cards were exempt.

Now, the Government of India, through Gazette notification dated May 16, 2023, has withdrawn this benefit extended to credit cards. Hence, even international credit cards (or your regular credit card when used abroad) have now come under LRS.

Where Is the TCS Angle?

The Government has been slowly bringing foreign remittances under LRS in the tax ambit. While the transactions do not give birth to tax liability per se, a small TCS does help the Government track the remittances.

A few years ago, all remittances by residents in excess of Rs 7 lacs per annum were subject to TCS of 5%.  A few exceptions here and there but the foreign remittances were certainly subject to friction. Note Rs 7 lacs was not per transaction limit but a cumulative annual limit.

In the Union Budget 2023, the threshold of Rs 7 lacs was removed and this TCS rate was increased from 5% to 20%. The only exceptions were expenses for education and medical treatment.

With the Government notification removing the exemption for international credit cards, the credit cards also come in the LRS limit and the TCS ambit.

However, following the public backlash, the Government subsequently issued a clarification that foreign currency payments on debit and credit cards up to Rs 7 lacs per financial year won’t be subject to TCS.

Hence, you don’t have to worry if you are swiping your credit/debit cards abroad for up to Rs 7 lacs in a year.

Note that you can use the same credit/debit card in India without worrying about TCS. Only your foreign currency transactions come under the ambit of LRS (and thus TCS). If you book international flight tickets and hotels on your own from travel portals such as MakeMyTrip or GoIbibo and make payment in Indian rupee, you don’t have to worry about TCS. However (and this is an exception), if you book an overseas travel tour package from MakeMyTrip, you will have to incur TCS impact even though the payment is made in Indian rupees. TCS on overseas tour packages is 5% now but will increase to 20% from July 1, 2023.

This 2-tweet Twitter thread from the Ministry of Finance will help answer many questions. Here is a video that explains this matter well.

For a quick cap on what is subject to TCS, you can check the following table tweeted by the Ministry of Finance. The only addition here will be for credit card/debit cards for which the threshold of Rs 7 lacs was later added.

remittance table

Should You Use Credit Cards While Travelling Abroad?

With credit cards, you do not just incur forex markup but also foreign currency transaction charge (nomenclature may vary). While forex markup is inbuilt into conversion rates (and you will likely get a bad deal), forex transaction charges can be up to 2-4% and will be billed separately. This significantly adds to the cost of using your credit card abroad.

With debit cards too, you will face similar problems.

Another practical aspect: While the TCS is supposed to be charged on international debit and credit card transactions once the expense exceeds Rs 7 lacs, I am not sure how the banks will track it.  Let’s say you have credit cards from both ICICI and HDFC banks. You use both cards abroad. The limit of Rs 7 lacs is not per card. It is a cumulative limit. How will HDFC bank know how much you have spent on ICICI credit card and vice-versa? I would expect the banks to follow a safer approach and apply TCS on each transaction. We will have to wait and see how this will be operationalized.

You do have an option of using prepaid forex cards and withdrawing foreign currency in India itself. Both fall under LRS. With such options, you won’t incur any forex transaction charge and will get a uniform exchange rate (since you are buying at one go, the exchange rate won’t fluctuate). However, these options don’t get the relaxation of Rs 7 lacs threshold. TCS of 20% will apply without threshold. This post looks at this comparison and explains different aspects well.

While using credit cards abroad can be expensive, these offer flexibility and you have an option to swipe in case of an emergency. So, you may not use a credit card abroad, but it is useful to carry one on your trips abroad.

Sources and Additional Read

Leave a Reply