The finance ministry has issued a clarification explaining the changes in the Liberalised Remittance Scheme (LRS). This is a scheme that enables Indian residents to remit funds abroad for specific and permitted purposes.
In a recent change, the finance ministry amended the rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending under the LRS. This essentially means credit card spending in foreign currency will now be a part of the LRS limit of $250,000. This was not the case earlier as credit card transactions abroad were exempt from LRS. The exemption has now been taken away. Moreover, spending by international credit cards will attract tax collected at source of 20%. These new rules will be applicated July 1st 2023.
Here are the key highlights of the finance ministry’s circular.
The circular explains that all resident individual including minors are allowed to freely remit up to $250,000 per financial year for any current or capital account transaction that is permitted. Highlighting the data, the circular shows the amount that has been remitted in the past few years:
FY 2020-21: $12.68 billion
FY 2021-22: $19.61 billion
FY 2022-23: $24 billion (of this, overseas travel accounted for more than half)
Why was this change required?
While abroad, a person could use international debt or credit cards for current account transactions. However, payments made by debit cards were already covered under LRS but expenditures by credit cards were not accounted for under the specified LRS limit which has led to some exceeding the limit of $250,000. Data also shows that international credit cards are being issued with higher limits. In fact, RBI had highlighted this issue to the government on multiple occasions.
How will this change help?
1. Differential treatment between debit and credit cards will be removed
2. Equity in the treatment of modes of drawal of foreign exchange
3. Total expenditure under LRS will be captured properly for prudent forex management
4. By-passing of LRS limits will stop
Other important clarifications
1. The circular also clarifies that TCS of 5% will be levied on expenses exceeding ₹7 lakh towards medical treatment and education.
2. Other expenses, including investments in real estate, foreign tours and travels would attract 20%.
3. LRS does not cover business visits of employees, subject to verification of the transactions.
4. For those availing loans for overseas education, a lower TCS rate of 0.5% would be levied above the ₹7 lakh threshold.