EXPLAINED | Charges you pay on credit card forex and what latest rules mean for you

The government, in the 2023 budget, introduced amendments in the Tax Collected at Source (TCS) rates, bringing forth a significant change in the financial landscape for international transactions. These changes are specifically related to the Liberalised Remittance Scheme (LRS) and transactions involving credit card payments. Originally slated to take effect from July 1, 2023, it has been deferred to October 1 to allow individuals and businesses to adapt to the changes and to facilitate the development of IT-based solutions by banks and card networks.

Overview of the new TCS rates

The Tax Collected at Source (TCS) is a form of taxation where tax is collected from the source of income itself. With the new amendment, the TCS rate on foreign remittance under LRS has been increased from 5 per cent to 20 per cent, applicable to outward remittances, investments, gifts, and tour packages. In contrast, the TCS rates are notably lower for transactions related to education and medical purposes.

Charges, fees applicable to credit card transactions abroad

When using credit cards for transactions while travelling abroad or making bookings for overseas tour packages, several additional charges may apply. These charges include:

Foreign Transaction Fees: Credit card issuers often charge a foreign transaction fee on each purchase made abroad. This fee is a percentage of the amount of each foreign transaction. It is charged for processing a transaction that occurs outside the issuer's home country.

Dynamic Currency Conversion Fees (DCC): Some foreign merchants or ATMs may offer the convenience of converting the transaction cost at the point of sale from the local currency to your home currency, known as Dynamic Currency Conversion. This service typically comes with its own fee.

Cash Advance Fees: If you use your credit card to withdraw cash at an ATM while you are overseas, you will likely be charged a cash advance fee.

Tax Collected at Source (TCS): As per the revised TCS rates effective from October 1, 2023, international credit card transactions over Rs. 7 lakh in a year will attract a TCS rate of 20 per cent.

Loading and Reloading Fees: This is the fee charged when you load money onto the card. There might also be a fee for reloading money onto the card.

Markup Fee: Most forex cards and credit cards used on foreign transactions charge users a 3.5 per cent mark up fee on the total transaction.

Inactivity Fees: If you don’t use your card for a certain period of time, some issuers may charge an inactivity fee.

Significance of the change in date

The change in the implementation date of the revised TCS rates from July 1 to October 1 provides an additional three-month window for individuals and businesses to adapt to these changes. This deferment means individuals and businesses can plan their finances and operations to align with the new TCS rates.

For financial institutions, the deferment offers extra time to update their IT infrastructure to efficiently collect and manage the revised TCS. The extra time could help ensure that adequate information and guidance are available to the public, leading to a smoother transition.

Understanding the Rs 7 lakh limit on TCS

The Rs 7 lakh limit plays a significant role in determining the TCS rates applicable to a transaction. For transactions under this threshold, TCS is either non-existent or significantly lower. No TCS applies to LRS expenditures and international credit card transactions up to Rs 7 lakh per year. TCS at a rate of 0.5 per cent applies to educational expenses below Rs 7 lakh that are financed by a loan. A rate of 5 per cent applies for education and medical treatment below Rs 7 lakh.

However, when this limit is exceeded, a higher TCS rate of 20 per cent becomes applicable, increasing the cost of the transaction. It's crucial for individuals and businesses to bear this limit in mind when planning transactions and managing their finances.

TCS credit card: Implications for individuals and businesses

The new rates are expected to impact both individual customers and businesses. For individuals making foreign remittances, the increased TCS rates would mean a higher outgo at the time of remittance, which could potentially discourage unnecessary spending abroad. Businesses, especially those dealing with foreign remittances and tour packages, would have to adjust their operations and strategies to align with the new rates.

For the education sector, the TCS rate is relatively lower. For students studying abroad or planning to, these changes might lead to additional financial planning. Medical treatments abroad would also attract a 5 per cent TCS if the expenditure is under Rs 7 lakh, and 20 per cent beyond this limit.

International credit card payments for transactions abroad would be exempt from TCS if the total transaction value does not exceed Rs 7 lakh in a year. Transactions exceeding this limit will be subject to the revised TCS rates.

Claiming TCS credits

Despite the increase in TCS rates, taxpayers can claim TCS credits during income tax filing. These credits can be claimed against their total tax liability, thereby reducing the overall tax payable. For this, they would need a TCS certificate provided by the collector.