Credit card users new rules here: 20% Tax from July 1; Details

Spending in foreign exchange through international credit cards will be covered under the RBI’s liberalised remittance scheme (LRS). New rule for international credit card users: 20% Tax from July 1; Details.

On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS.

The central government in consultation with the Reserve Bank of India amended a rule that will attract 20 per cent tax collection at source (TCS) on credit card usage outside India. This announcement was made through a late-night notification on Tuesday. 

The finance ministry said in the notification that the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, will include international credit card payments under the Liberalised Remittance Scheme (LRS) from July 1.

The notification said that rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 has been omitted, which brings the usage of international credit cards towards meeting expenses on a visit outside India under LRS.

The notification brings transactions through credit cards outside India under the ambit of the LRS with immediate effect, which enables the higher levy of TCS, as announced in the Budget for 2022-23, from July 1.

It may be noted that the use of credit cards in foreign countries while travelling was not included under the LRS before. It earlier included debit card, forex card abd bank transfers. While the government’s move is aimed at tracking high-value overseas transactions, the move has not gone down well with people and tax experts, who have voiced their concerns on social media.

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To sum it up, any spending using international credit cards will attract a higher rate of tax collection at source at 20 per cent effective July 1. This is because credit card transactions made outside of India will come under the ambit of the LRS with immediate effect, enabling higher levy of TCS.

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Till July 1, a TCS of 5 per cent will be levied on such transactions, except medical and education-linked sectors. After July 1, however, all such transactions will be charged at 20 per cent.

It may be noted that under the LRS scheme, Indian residents are allowed to remit up to $250,000 (roughly over Rs 2 crore) per year without any prior approval from the Reserve Bank of India.

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The use of international credit cards by Indians on foreign trips or even international purchases online were not included while comptuing the overall LRS limit of $250,000 per person in a financial year.