On May 19th, the Ministry of Finance announced an amendment to FEMA (Foreign Exchange Management) Act to include international payments done via credit cards under LRS (Liberalised Remittance Scheme) and liable to TCS (Tax Collected at Source).
In this article, let us understand what is LRS and how this amendment will impact you.
What is Liberalised Remittance Scheme (LRS)?
LRS was introduced in 2004 by RBI to facilitate transfer of funds outside India easier and faster. LRS is meant for Indian residents for remitting funds for specific purposes. Before LRS was launched, remitters required specific approvals from RBI for every remittance with many restrictions under the FEMA Act. Initially the LRS limit was USD 25,000 in a financial year. It was increased to USD 50,000 in 2007 and USD 2,50,000 in 2013.
What are the benefits of LRS?
Any resident individual who holds a PAN card, passport and bank account can utilise the LRS limit.
Investment Purposes: Investments in overseas assets e.g. stocks, bonds, real estate and mutual funds are permitted under LRS. Crypto currencies, derivatives, margin trading or any speculative investment is not allowed.
Educational Purposes: Any remittance for paying tuition fees and related expenses e.g. lodging, study material etc is included in LRS.
Gifts: Gifts to family members and donations to charitable organizations can be done via LRS.
Foreign Travel: Tickets, hotel bookings, food, shopping during an overseas trip is permissible under LRS.
Business Investments: Resident individuals can invest in a business or startup overseas.
Medical Treatment: Expenses incurred for medical treatment in a foreign country are included in the LRS provisions. This enables many patients to avail specialised treatment for specific diseases.
What is TCS (Tax Collected at Source) for LRS remittances?
TCS or Tax Collected at Source is a tax deducted at the point of sale i.e. tax is deducted at the time of transaction. TCS is adjusted against a tax payer’s income tax liability at the time of filing return.
In Union Budget 2023, the Tax Collected at Source (TCS) was increased from 5% to 20% for international payments and transactions done under the LRS. The increased TCS is effective July 1st.
On May 19th, MOF announced a TCS on all international credit card transactions, however, looking at concerns from the public, it clarified that individual payments up to Rs 7 lakhs done from international credit or debit cards is excluded from LRS limit and will not incur TCS. Any payment exceeding Rs 7 lakh will attract 20% TCS. The fine print and further clarification will be issued in due course.
TCS for medical and educational remittances is the same as earlier, nil TCS till Rs 7 lakhs in a financial year and 0.5% beyond this limit.
How will it impact you?
If you are traveling overseas and making payments with your credit card, you need to be mindful of the limit and tax implications. Till now, credit card payments were over and above the LRS limit, but now these are part of FEMA LRS guidelines and as a conscious shopper and tax payer, one must be aware of the limit.
TCS can be claimed when you file your income tax returns, but it is still burden, a huge upfront increase in outflow and additional paperwork to claim it later.
It will also be a hassle for corporate employees traveling abroad and making credit card payments. They will incur TCS upfront and may have to claim on their personal IT return later.
In case the income tax liability is below the TCS amount deducted, you will have to claim a refund, which is again a time consuming process.