The Union Finance Ministry has included use of credit card abroad by an Indian resident within the $250,000 limit that an individual is allowed to remit abroad in a year under the liberalised remittance scheme (LRS).
- This, in turn, means that TCS (tax collection at source) of 20 per cent will be applied on all international credit card transactions.
- In a notification dated May 16, the Finance Ministry omitted ‘Rule 7’ from the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Key points
- Under LRS, the Reserve Bank of India allows residents to spend funds abroad up to the specified ceiling for investment and expenditure, including travel, education, medical treatment and buying securities and physical assets.
- Until now, a resident Indian’s overseas use of credit cards during foreign travel was excluded from the $250,000 cap by a provision in the Foreign Exchange Management (Current Account Transactions) Rules, 2000. The rule change means that international credit card transactions are also considered for determining this limit under the LRS scheme.
- Further, resident individuals can avail of foreign exchange facility within the limit of $2,50,000 only. The scheme is not available to corporates, partnership firms, HUF, and trusts.
- Individuals require the RBI’s prior permission to make any remittance above this threshold. The move could impact spending by high networth individuals during foreign visits as the RBI’s nod is required for breaching the limit.
- The approval requirement will ensure that details of such overseas spending is reported to the authorities. The government has been sharpening its data gathering mechanism as part of efforts to improve oversight of transactions.
- The $250,000 cap on LRS serves to conserve foreign exchange and helps to prevent flight of capital.
- In addition to regulating foreign investment by individuals, it also aids efforts to check money laundering. The cap also serves to encourage domestic investments and ensure macro-economic stability.
- LRS always attracts TCS, but the issue here is the higher rate. The FY24 Budget had proposed maintaining 5 per cent TCS for foreign remittances exceeding Rs 7 lakh, towards education and medical treatment.
- Similarly, it proposed no change in the 0.5 per cent TCS on foreign remittances exceeding Rs 7 lakh towards education through loans from financial institutions.
