Travelling abroad? Here's how you can obtain favourable forex rates

Ahmedabad-based yojana singh, a 40-year-old adventure seeker, cannot wait to visit the US. She has planned her first trip abroad down to the last detail, including a detailed packing list and an extensive shopping expedition. However, she hasn’t given much thought to financing options for international shopping, dining and travel. Singh is confused about whether she should carry forex from India or use an international debit or credit card in the US, and wants to know the best and most cost-effective option. “My credit card levies 3.5 per cent as markup fee plus GST for cross-border payments. I am looking for some cheaper options to make the most of my trip.”

And just like Singh, even you should look for the cheapest options to carry forex abroad, as it is important to plan ahead your payment options when travelling to foreign countries. Although cash has its advantages, it also carries the risk of being lost or stolen and may not provide you with the greatest conversion rates. Furthermore, people are more at ease utilising digital money following the Covid-19 outbreak, as some countries restricted the use of physical currency during the pandemic. This is why it is so important to be aware of viable options.

Fortunately, technology has enabled faster and more user-friendly solutions for overseas transactions. Payment options have expanded beyond only cash and credit cards in recent years. For example, UPI (Unified Payments Interface) has recently expanded into a few foreign markets, making it easier to make payments while abroad. Here are a few options to make payments when travelling abroad, along with their benefits and drawbacks, to help you make an informed decision.

International Credit Cards

Most credit or debit cards offered in India have international acceptance. These cards are generally issued via global networks such as Visa and Mastercard. While credit cards are convenient and widely accepted, they levy a forex markup as well as tax collected at source (TCS) at a rate of 20 per cent (applicable from July 1) on spends of more than Rs 7 lakh in foreign currency transactions, according to recent guidelines issued by the government. “When you’re swiping today, you get three line items. The item cost in dollars, markup charges and the GST on the forex. You might get a fourth line now, which is the 20 per cent TCS [for spends of more than Rs 7 lakh]. But let’s wait for clarity to emerge on how this is going to get operational by July 1,” says Adhil Shetty, CEO of BankBazaar.com.

So, while there is no TCS below spends of Rs 7 lakh currently, there are other fees to be considered. “The cost-effectiveness of these cards is contingent upon factors like the exchange rate, foreign transaction fees, and other card-related fees. Some credit cards offer rewards, such as cashback or points, for foreign purchases, which can mitigate a portion of the costs associated with using the card,” explains Rikant Pittie, Co-founder of travel booking platform EaseMyTrip.

For example, there is the forex markup fee (charged on every foreign currency transaction) of 0-4 per cent that differs for each credit card provider. Although that may not sound like much, it can add up to quite a bit. Consider this: if you make a purchase of Rs 10,000 using your international credit card, it’s possible that you’ll have to pay an extra Rs 400 as forex fee.

Currently, many banks have started issuing credit cards with no or modest forex markup costs, thanks to their partnerships with innovative fintechs. For instance, there is no markup on forex cards like RBL World Safari Credit Card, while One Card and YES First Exclusive Credit Card charge 1 per cent and 1.75 per cent markup fees, respectively, for transactions abroad. “In these (debit/credit) cards, the primary currency of transaction is INR, hence there is a forex markup. With these cards, customers may not have control over rates when making ATM withdrawals or spending overseas,” says Puneet Kapoor, President of Products, Alternate Channels & Customer Experience Delivery at Kotak Mahindra Bank.

Then, the other factor to keep in mind is interbank exchange rates (IBR). These are rates at which banks buy and sell currencies from each other. However, credit card companies may charge customers more than the IBR for foreign transactions to cover their expenses. So, do keep in mind the margin charged by your card provider over the IBR, especially in case of zero-markup-fee cards.

However, none of these can be done if you don’t activate international transactions on your card before going on your next foreign trip, as most cards do not have this option activated by default.

Forex/ATM withdrawals

Travelling abroad may also require cash, as it is determined by the country of travel. For example, in the US, credit cards are widely accepted. But in countries like Vietnam and Indonesia, card payments may not be so popular, so you may need to carry cash. An important point to keep in mind is that airport forex rates are marked up, so it’s best to avoid buying them there. Therefore, it is advisable to buy forex at an online marketplace or a bank with a low IBR markup.

Moreover, there will be TCS on cash conversions too from July 1. “At present, 5 per cent TCS is only applicable above Rs 7 lakh. Starting July 1, TCS will be applicable on currency notes on the complete amount at 20 per cent,” says Anand Tandon, Founder & CEO of Myforexeye, a Noida-based fintech firm. Experts say that though the TCS amount can be adjusted at the time of filing income-tax returns, it creates a cash-flow problem for travellers.

ATM withdrawal is another option. However, care should be taken when withdrawing cash internationally. Several parties are involved when using an ATM card abroad, including the bank that issued the card, the bank that disbursed the cash, and settlement agents like Visa or Mastercard. Converting your money into foreign currency also incurs markup fees. If a particular ATM transaction looks expensive, cancel it and choose another ATM.

Unified Payments Interface

UPI has revolutionised payments in India in recent years. The good news is that the platform can now be used abroad in a few nations. For instance, PhonePe introduced UPI International in February. This lets Indian PhonePe users utilise UPI to pay foreign merchants in the UAE, Singapore, Nepal and Bhutan by activating international transactoins at merchant locations on their UPI-linked bank accounts. The payment is made via Indian banks and the recipient gets funds in their local currency. This can help reduce plastic card usage abroad. However, UPI International as a whole is yet to take off. First, it’s confined to certain countries. Second, the merchant outlet must be UPI-enabled and offer QR codes for you to pay. Though small, UPI International is a key step towards making international travel and payments easier.

Forex Travel Cards

You can load these cards with one or multiple foreign currencies and use them interchangeably in different countries. A forex travel card is typically loaded with funds upfront. While issuing it, some firms may charge you a nominal fee, while many offer it free of cost. Again, the exchange rate used to buy forex for the card is typically higher than the IBR as it covers the operating costs. So, check the margin the issuer charges for IBR.

Preloading a forex card is the safest and cheapest option. It locks in exchange rates, protecting you from fluctuations. “Forex cards do not incur additional foreign exchange markup fees as long as the card is used within the same currency jurisdiction for which it is loaded,” explains Rohit Chhibbar, Head of Credit Cards at Paisabazaar. But, will customers be charged TCS on forex cards? “On cards, TCS will be applicable above spends of Rs 7 lakh at 20 per cent from July 1,” says Tandon of Myforexeye.

However, these cards charge for ATM withdrawals and balance enquiries, and have a daily withdrawal limit. But what if you run out of money abroad? Well, you can easily reload these cards online from anywhere.

Picking the right rate

Buying foreign currency requires negotiating exchange rates. Banks and forex dealers sometimes have a considerable margin, so don’t accept them immediately. Since banks and money exchangers exploit customers’ ignorance, knowing the IBR might help you negotiate better rates.

@teena_kaushal