The Liberalized Remittance Scheme (LRS) was introduced in India in 2004. The scheme enables Indian residents to remit funds abroad for specific purposes. The system has been one of the essential instruments for promoting international trade and investment and facilitating capital flows into and out of India.

The original limit was USD 25,000 or equivalent. Over time it was hiked as the scheme got popular. In 2015, it was increased to USD 2,50,000 per head. The LRS limit per head is USD 250,000 per financial year (April-March). This limit is even available for minors. If you are a family of 4, you can transfer USD 1 Million outside the country annually.

However, the Government of India had kept spending on International Credit Cards out of the domain of the LRS for all these years, as per the FEMA Current Account Rules and the RBI Master Directive.

The Government of India updates FEMA Current Account Rules to bring Credit Card usage under the ambit of LRS.

A minor change made to the LRS rules, notified on May 16, 2023, will change a lot of things that will matter for Credit Card usage outside the country.

With this move, the Government of India has now started to count Credit Card spending on Indian issued Credit Cards outside the country as against the LRS Quota of USD 250,000 per head. While the limit is pretty high for individual usage, take note that if you hit the limit on the top end, you need the permission of the RBI to spend further in currency abroad.

Essentially, this affects everything you may do on a business or a personal spend outside the country. Tickets for Broadway, Hotel Stays, a random coffee paid for on your credit card by the street side,  everything will now need to be under the 250,000 limit per financial year. And as per the initial interpretation, if you pick that tab for a bunch of colleagues while travelling abroad, it also goes against your quota of LRS. And if you run a big server capacity using a data centre in the US but use your personal credit card to pay for it, that will also be added to your LRS limit.

Tax Collection at Source applicable for international transactions, going up to 20% in July 2023

Now here is the double whammy. Since so far, Credit Cards have been kept out of the ambit of the LRS; there has been no taxation on the use of credit cards abroad. However, since Credit Cards are now brought under the purview of the LRS, effective immediately, they are also subject to Tax Collection at Source.

The government of India rules currently authorise a Tax Collection at Source of 5% of the amount used under LRS for any purpose when this goes beyond INR 7 Lakhs in a financial year. For educational purposes, the amount is 0.5% and for foreign package tours, it is a flat 5%. So let us say you use INR 2,00,000 for a trip to Singapore under a package tour. You would pay INR 2,40,000 to the person who sold you the tour, with INR 40,000 being sent to the Government of India under your PAN. You can later ask for a refund of this amount if your total income tax liability is lesser than the tax already deducted.

However, effective July 1, 2023, you must pay a 20% Tax Collected at Source without any minimum limits on which the TCS starts. This means every time you pay USD 4 for a coffee in New York, you are also depositing USD 0.8 towards your taxes in India, which will either be adjusted against your income tax or will have to be refunded to you after you file your returns.

Here is the relevant excerpt from the tax proposals for this year (which is now law).

In this case, the knockout punch is that Credit Card issuers in India still need the systems or processes to make this work for now. The banks may have other departments that have this facility activated (Foreign exchange sales, Forex Cards and so on). So, if the banks wanted to charge the 5% TCS on Credit Card purchases outside India effective immediately because you paid a big bill at the Louis Vuitton flagship store in Paris, they need to learn how to deal with it, at least now.

Bottomline

Credit Card spending outside India became a lot more hassle-some. The Credit Card spending abroad will now be included in your Liberal Remittance Scheme quota of USD 250,000 per head, and there is no way to track how much you used up (apart from collecting all the bills at your end). So, if you wanted to use a big one-shot payment to go wire abroad for that house in Portugal you have been wondering about for your retirement, best of luck because how will you spend abroad then? And now that Credit Card spending is covered under LRS, effective July 1, 2023, it will all be subject to a 20% Tax Collection at Source, which can be adjusted against your tax liability.

What do you think of all the changes to your international credit card spending?

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