1. 1.1 The Liberalised Remittance Scheme (‘LRS’) allows resident Indians to remit funds outside India without any restrictions or obtaining prior approval of the Reserve Bank of India (RBI). All resident individuals (including minors) can remit up to US$250,000 per financial year under LRS for any permissible current or capital account transaction. For remittance exceeding the specified limit, prior approval of RBI is required.

   As per Rule 5 of Foreign Exchange Management (Current Account Transactions) Rules, 2000, individuals can avail foreign exchange for the purposes mentioned in Schedule III of the said Rules. This covers private visits to any country (except Nepal and Bhutan), gifts or donations, going abroad for employment, emigration, maintenance of close relatives abroad, travel for business, expenses in connection with medical treatment abroad, studies abroad and any other current account transaction. This excludes payment made from funds held in Resident Foreign Currency Account.

2. 1.2 Effective from October 1, 2020, in order to widen and deepen the tax base, Section 206C(1G) of the Income-tax Act, 1961 (the Act) was introduced. This provided for Tax Collection at source (‘TCS’) at the rate of 5% on foreign remittances through the LRS and on the sale of overseas tour packages. While there was a threshold specified of Rs 7 lakh per annum over which TCS would apply for foreign remittances, there was no such threshold for sale on overseas tour program packages till now.

Recent developments, including increase in TCS rate, the removal of an exemption for international credit card usage and clarifications regarding certain transactions, have brought about significant changes in the landscape of foreign remittances and their taxation. Let’s look into the details and implications of these updates.

1. 2.1 Effective July 1, 2023, the Finance Act 2023 has introduced certain changes to the TCS on Forex drawls/ remittances by Resident Individuals under LRS. The TCS rate on foreign remittances under the LRS has been raised from 5% to 20%.

   The revised TCS rates applicable from 1 July 2023 for the various purposes and the threshold limits are covered in table below. These TCS amounts will be collected by the Authorised Dealers who are responsible to make remittance outside India and towards overseas tour packages.

   Nature of remittance	Threshold per annum (₹ )	TCS rate (%) up to 30.06.2023	TCS rate (%) after 30.06.2023
   Remittance for education (through eligible education loan referred to in Section 80E)	7,00,000	0.5	0.5
   Remittance for education (through other than aforesaid eligible education loan)	7,00,000	5	5
   Remittance for medical treatment	7,00,000	5	5
   Sale of overseas tour package	Nil	5	20
   Any other permissible remittance (for purchase of bonds, shares, real estate, gift, travel etc.)	Nil	5	20

   It may be noted that if remittance for education is higher than the amount of loan, then in such a case the applicable TCS rate, for amounts in excess of Rs. 7 lakhs, would be 5% instead of 0.5%

2. 2.2 Further, the Government of India, vide its notification dated 16 May 2023, has omitted Rule 7 of the FEM (CAT) Rules, 2000. The aforesaid Rule 7 exempted use of international credit cards from LRS for payments by a person towards meeting expenses while such person is abroad. Thus, while payments through credit cards from India or payments through debit cards were covered under LRS, if international credit cards were used outside India, an exemption was available earlier under Rule 7.

   Thus, credit card transactions too have been brought on the same footing as debit card transactions. The rationale behind the same as explained by the FAQs issued by the Finance Ministry was to bring spending overseas through international credit cards under the LRS and to curb individuals from exceeding their LRS limit.

3. 2.3 The above provisions are applicable to Resident Individuals only and are not applicable to Non-Residents. A non-resident making remittance from his Bank account in India or making payment to local tour operator for his travel while he is on a visit to India, is not covered under the TCS provisions.

1. 3.1 As the usage of international credit cards may not fall under remittance for education, medical treatment or sale of overseas tour packages, it would fall under ‘any other remittance’. It would therefore be subject to TCS at the rate of 20 percent with effect from July 1, 2023.
2. 3.2 However, relaxation has been extended to business visits of employees and it has been clarified that LRS would not cover expenses incurred on such trips and they would be deemed as current account transactions, subject to verifying the bona fide of the transaction.
3. 3.3 Further, due to concerns raised from various quarters, it has been clarified by the Ministry of Finance vide its clarification dated May 19, 2023, that any payments by an individual using their debit or credit cards up to ₹ 7 lakh per financial year would be outside the purview of LRS.
4. 3.4 It has also been clarified in the FAQs that TCS on remittance for travel and incidental expenses related to education and medical treatment, would be same as that applicable for education and medical treatment itself. This would be a relief to persons remitting for travel / incidental expenses pertaining to education or medical treatment abroad.
5. 3.5 Thus, the new changes would impact high net-worth individuals making investments overseas and those making payments for the purchase of overseas tour packages as they would have to bear an additional cash outflow of 20% by way of TCS. It may however be noted that TCS on credit cards can be adjusted against the taxes payable.
6. 3.6 Resident individuals using credit and / or debit card from their Foreign exchange resources outside India will not be covered as there will not be any remittance from India.

Multiple means are employed by the Government to widen the tax net. It started with domestic payments of certain nature for filing tax returns irrespective of TDS or TCS provisions, increasing the TDS net to include almost all nature of payments including purchase of goods and sale of goods as an ultimate measure. Remittances outside India were covered w.e.f. 1.10.2020 but were not considered enough to bring in the fresh dose of higher tax rate on remittance for purposes other than medical and education. In select categories of payments, rate could be higher if the remitter is not a tax return filer.

Thus, the above TCS provisions are an indirect and non-voluntary means to collect larger amounts of Advance Tax in select cases.