In a notification, Finance Ministry stated that all international credit card transactions would be accounted as spending under the Liberalised Remittance Scheme (LRS). This was done by deleting Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. An earlier notification has stated that all transactions under LRS will be charged a 20% tax collected at source from 1 July 2023.
Rule 5 under FEM rules, 2000 mandates prior approval from the Reserve Bank of India for every drawal of foreign exchange for transactions. However, Rule 7 said Rule 5 would not apply to international credit card payments made during an overseas visit. So, to bring the credit card transactions under the ambit of LRS, rule 7 was deleted.
LRS is an RBI-run scheme to allow Indians to remit money outside India up to $250,000 in one year without any permission from the Reserve Bank of India (RBI), as per Rule 5 Foreign Exchange Management (Current Account Transactions) Rules, 2000. From July 1, 20% of the transaction amount will be charged as Tax Collected at Source for all LRS transactions. However, taxpayers can claim a refund while filing the income tax return.
Before this, only spending on Foreign travel and remittances to kin living abroad was considered under LRS. But now, credit card spend in international destinations will also be considered under the scheme. As a result, spending on international holidays or purchases of foreign stock will become 20% costlier. However, the deducted tax can be claimed by filing an income tax return, which will only improve tax compliance.
However, it is worth noting that spending on international education and medical treatment will continue to be taxed at 5% only. The remittance to international students via educational loans from financial institutions will only be taxed at 0.5%.