Here’s how you can reduce the TCS hit on your foreign trip

Want to travel abroad? What if you have to shell out a few lakhs more upfront? Well, guess what, that’s just what you may have to do if you wish to travel abroad in a few months.

This is a result of the increase in tax collected at source (TCS) on some foreign transactions, like foreign tour packages, to 20 per cent (from the current 5 per cent) that Union Finance Minister Nirmala Sitharaman announced in the Budget for 2023-24.

According to Amit Singhania, Partner at Shardul Amarchand Mangaldas & Co, the government appears to have calculated that a person travelling abroad must fall in the 20 per cent income-tax bracket, which means they must earn Rs 12–15 lakh a year.

This comes amid a boom in foreign travel after two years of enforced isolation because of the pandemic. Consider this: Data from the Reserve Bank of India (RBI) shows that Indians have spent more than $1 billion on foreign travel every month since June 2022. And a recent report by private insurer ACKO and research firm YouGov suggests that this trend is set to continue. Nearly 31 per cent of respondents said they would take more international trips this year. The report, which surveyed people aged between 24 and 45 across seven major Indian cities, also found that around 48 per cent of them said they would increase their travel budget in the coming year.

Though the government has postponed the rule’s implementation, the relief is temporary, because it will come into force on October 1.

So, it’s imperative that you understand this tax.

Put simply, it is a tax collected by the agent from you when you book a tour package, and can be collected upfront. The agent then deposits it with the tax authorities. The rate of taxation is 5 per cent if the expenditure is below Rs 7 lakh and 20 per cent for sums beyond that. It applies to foreign remittances made through the Liberalised Remittance Scheme (LRS), which allows resident Indians to remit money abroad every fiscal for travel, education, medical treatment, investment in foreign stocks, real estate, etc. The sum allowed is up to $250,000 in a fiscal.

But TCS is not an additional tax; you can either adjust it against your total income tax liability or claim it back while filing income tax returns (ITR).

“There is no ‘cost’ per se for the traveller since he will get credit for the TCS. However, it may be a temporary cash flow issue, which may be adjusted against the quarterly advance tax liability. If the TCS exceeds the traveller’s total tax liability in a financial year, he may claim a refund when filing income return,” says Shruti K.P., Partner at IndusLaw.

So, say, you book your overseas tour package from domestic online travel agents or aggregators such as MakeMyTrip, OYO, EaseMyTrip, and Yatra, then the 20 per cent TCS will be levied after October 1.

Suppose you book a foreign tour package for a family trip after October 1, then 20 per cent TCS will be deducted if the package costs more than Rs 7 lakh, unless you have booked it using an international credit card, which does not attract TCS. Let’s take the example of a tour package for Switzerland that costs around Rs 10 lakh. Here, the agent will collect TCS of 5 per cent on Rs 7 lakh and 20 per cent on the remaining Rs 3 lakh. If you add tax, then, the package will work out to Rs 10.95 lakh, which means the TCS is Rs 95,000.

beat the levy

If you’re not too pleased by the prospect of having to shell out more because of the tax, fear not, there are a few hacks that help you save on the levy.

Buy forex in advance: The Union finance ministry has also increased the TCS on foreign exchange (forex) transactions by amending Section 206C of the Income Tax (I-T) Act.

Sudarshan Motwani, Founder and CEO of BookMyForex.com, says, “TCS will not apply to forex transactions below Rs 7 lakh in a financial year. If you intend to travel or transfer money abroad and need to purchase forex worth more than Rs 7 lakh, you can book your orders in advance. Following RBI’s guidelines, you may purchase currency 60 days before your trip. If you travel abroad before November 30, you can buy forex worth more than Rs 7 lakh by September 30, and avoid paying 20 per cent TCS.” The current rate is 5 per cent for forex worth more than Rs 7 lakh.

Avoid packages: You can opt for standalone bookings of stay, travel ticket, etc. The I-T Act defines a tour package as one that offers a visit to a foreign country and includes expenses like travel and stay. But it is vague beyond this definition, says Maneet Pal Singh, Partner at accountancy firm I.P. Pasricha & Co. “The terminology used in the law is overseas tour package, and the term tour package is [not] clearly defined in the I-T Act or rules.” Singh suggests booking components like hotel, flight tickets and cab separately.

Pick a foreign tour operator: International credit card transactions with a foreign tour operator do not attract TCS. Reports suggest that such transactions could be brought under LRS in six to eight months. In the interim, Singh says, “If you use an international credit card to purchase tickets and hotel bookings from a foreign tour operator, the strategy could result in significant savings. Therefore, if you book online through a foreign website, you may avoid paying TCS.” Besides, Singhania of Shardul Amarchand Mangaldas points out that foreign aggregators have not been collecting the current 5 per cent TCS, though they were required to. “However, if remittances made to foreign travel aggregators amount to LRS, the 20 per cent TCS may still apply [if] the amount paid to such agents is more than Rs 7 lakh in a year.”

Echoing their views, IndusLaw’s Shruti says, “The [government] has said that international credit card payments will not fall within the ambit of LRS until further notice. While under Indian law, the international tour operator may also be required to collect TCS, they are unlikely to undertake the exercise.”

Use your credit cards smartly: Credit cards will not currently attract TCS. “Suppose you plan to go abroad, you can use your international credit card to book and save TCS. However, remember that once the TCS applies to cards, if you plan to go with your family or friends, you can still smartly use your card to book flight tickets and your spouse’s credit card for hotel bookings. Then, for each of you, the total payment made through all cards will have to be within Rs 7 lakh. However, you must consult a tax expert before you do this to clarify the impact beforehand. For instance, if you and your spouse file returns jointly under HUF, the implications may differ,” says Adhil Shetty, CEO of BankBazaar.com.

But credit cards may include charges on foreign transactions. “It is best to avoid dynamic currency conversion and pay in the local currency,” says Shetty. And finally, heed Shetty’s advice and consult a tax planner to ensure you are fully compliant with the rules.

@imNavneetDubey