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Will you have to pay 20% extra for international travel? The new TCS rule explained

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Published on June 30, 2023. EST READ TIME: 3 minutes

When you plan a trip abroad you have to ensure you follow all rules set by the resident country and those of the country you are visiting. You should always have individual travel insurance to ensure there are no financial implications in case of a mishap. Having international travel insurance is essential and you also need to know the rules about spending and taxes.

Those travelling abroad know that the Government of India levies a TCS i.e. Tax Collected at Source for international spending. Recently, the FEMA i.e. the Foreign Exchange Management Act, has increased the tax. The tax was 5% and now it has been increased to 20%. The new rule will be implemented from July 1st and some other changes have also been accounted by the Finance Ministry for transactions done on credit cards. The new rules and the changes have caused a lot of confusion and people planning to travel abroad have a lot of questions. Let us make it simple and explain the new rule.

What is Tax Collected at the Source?

For the unversed, let us first explain TCS. This is a tax that the seller collects from the buyer when he is selling to him and he needs to deposit this to the tax authorities. The tax is refunded as per the laws if the buyer is eligible after filing his Income Tax Returns. The rule on TCS on foreign travel limit has been changed and let us understand this next.

The New Rule Explained

Till June 2023, the TCS by the Finance Ministry was 5% but with the changes it will increase to 20% from 1st July. This implies if you make any travel bookings, your cost will increase and you will need to pay 20% extra than your cost. The cost of any accommodation abroad, airline tickets and international packages will now cost 20% more. This will imply any form of payment.

Where is this new rule applicable?

The rule of TCS will apply to all kinds of spending abroad. You can spend money on local commutes, restaurants, shopping, tickets, etc. and the TCS will be levied and is applicable. All this spending can be done on forex cards or debit and credit cards and the tax will be levied. However, there is one clarification which is needed to be understood. The ministry has said that in a financial year, if you spend up to 7 lakhs on your international credit and debit cards, you will not be charged any TCS. Any spending under that amount will not be included in the Liberalised Remittance Scheme.

Does booking through an agent save TCS?

If you book any package or tickets through a travel agent, you will be required to pay an extra 20% to them for their services and assistance to help you book tickets. While booking hotels and flights always remember to book travel insurance.

Effect on credit card spending

The major change in the rule apart from the change in the percentage is that earlier credit cards were not included in the LRS. Forex cards, debit cards and bank transfers were included and one was charged 5% TCS. But now, the same will be applicable on credit cards and money spent using them above Rs. 7 Lakh.

Are there any foreign transactions that are exempted from the new TCS rule?

Though TCS will be levied on almost all transactions there are two exceptions that have been made by the Ministry of Finance under the changes in the FEMA. If you spend money on medical treatment abroad or for any educational purpose, there will be no change in the TCS rate.

Claiming TCS

Essentially, TCS is like an advance tax that you pay to the Income Tax Department. Once you file the IT returns at the end of the year, you can get your tax back. When you file your returns, you will need Form 26AS and you can claim the tax amount paid.

This means that though you will have to spend more amount when you book your holidays or spend money abroad, you can claim the amount back later.

The thing to understand here is that the TCS rule more than an increase in cost is more of a cash flow issue. For example, when booking any holiday your cost will go up by 20%. This means for a holiday which was going to cost you say Rs. 100, you will Rs. 120. Rs.20 you can claim back later when you file your IT returns. Thus, at the end of the quarter or year, this Rs. 20 will be credited to you but yes, when booking you had to spend Rs. 120. At the end of the year, the cost remains the same, but during that time, you have spent more money.

Conclusion

The new rule came as a big surprise to travel companies, agents and of course the travellers. This is bound to cause a dip in travel plans also post July and this is mainly a lack of understanding and the ability to bear the increased cost. The government has done this with an aim to encourage domestic spending and boost tax revenue. Having a clear understanding is important to see how it will affect you and that is only when any user can take a call about travels and remittances abroad.

Disclaimer : The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales

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