If you are paying through an international credit card abroad, you need to be cautious as such expenditure will now be treated as part of the limit under the Liberalised Remittance Scheme (LRS), according to the changed rules notified by the Finance Ministry.

Under LRS, all residents, including minors, are allowed to freely remit up to $250,000 per financial year (April–March) for any permissible current or capital account transaction or a combination of both. Further, residents can access foreign exchange facility only within the limit of $250,000 .

Also read:LRS: Resident Individuals may open a Foreign Currency Account in IFSC

Rule 5 of Foreign Exchange Management (Current Account Transactions) Rules, 2000, mandates prior approval from Reserve Bank of India for every drawal of foreign exchange for transactions. However, Rule 7 says Rule 5 will not apply to international credit card payments made during an overseas visit.

Now, the finance ministry in consultation with the RBI has notified “omission of Rule 7” with effect from May 16.

Also read:RBI directs SBM Bank (India) to stop all transactions under Liberalised Remittance Scheme

Explaining the changes, Abhishek Sanyal, Partner with Economic Laws Practice, says Rule 7 excluded the applicability of the $250,000 limit per financial year under LRS for international credit card payments during an overseas visit.

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“This rule has been omitted and, accordingly, all payments made using an international credit card are also within the $250,000 limit per financial year. The intent is that all current account transactions by resident Indians should be under the $250,000 limit per financial year,” he said. It may be noted that in the annual budget, TCS (tax collected at source) of 20 per cent was made applicable with effect from July 1, 2023, on any payment towards an overseas tour package. This will also be applicable on international credit card spends.

Yogesh Chande, Partner with Shardul Amarchand Mangaldas & Co, says the deletion of Rule 7 will tighten the use of international credit cards during overseas visits, and will bring it under the purview of schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, which deals with LRS. This would allow RBI to closely monitor the use of credit cards for foreign travel. “The deletion is to ensure that payments for foreign tours through a credit card do not escape tax collection at source (TCS),” he said

Experts take

Experts feel that residents and non residents will have to do some extra compliance. According to Russell Gaitonde, Partner, with Deloitte India, given the recent changes made to the income-tax law starting July 1, 2023, issuers of credit cards in India will need to collect TCS at the increased rate of 20 per cent from tax payers in India on their LRS and forex transactions undertaken using their credit cards. Banks/NBFCs will need upgrade their systems to this effect. For Indian residents, they will need to be mindful of the fact that they will be required to pay TCS on their international transactions performed using their international cards. Hence, they will need to claim credit for such tax paid in India when filing their annual income-tax returns.