If you are planning to go on an international trip with your family, be ready to bear a higher cost upfront due to a new tax collected at source (TCS) rule. When you book, offline or online, overseas tour packages of more than Rs 7 lakh in a financial year, you have to pay TCS at 20% from October 1, 2023. If the foreign tour packages cost up to Rs 7 lakh, TCS will be levied at 5%. Is there any way to reduce this additional upfront cost? Read on to find out.
What is the new TCS rule on overseas tour packages from October 1, 2023?
Let us first understand what constitutes an overseas tour package. The Ministry of Finance has defined the term clearly to make it easier for taxpayers.
Explaining it, Lokesh Shah, Partner, IndusLaw, says, “To qualify as an overseas tour programme package, there has to be at least two of the following: international travel ticket; hotel accommodation (with or without food, boarding or lodging; any other expenditure of similar nature or in relation thereto.”
Keep in mind that the responsibility of collecting TCS lies with the travel agent, be it offline or online, even when you are paying in the rupee. So even if you book your overseas tour from domestic online travel aggregators such as MakeMyTrip, Yatra or EaseMyTrip, you have to pay TCS at the specified rate.
How to plan your travel abroad to bring down TCS to zero
Given the escalation in upfront cost due to the new rule, is there a way to not pay the high TCS while travelling abroad? Yes. If you book your flights and hotels and sightseeing separately, instead of making a single booking, it will not be considered a tour package. The higher TCS rate will not be applicable on such bookings.Neeraj Agarwala, Partner, Nangia Andersen India, says: “The purchase of only an international travel ticket or purchase of only hotel accommodation by itself is not covered within the definition of ‘overseas tour programme package’. Accordingly, travellers must consider purchasing international travel tickets and booking hotel accommodations separately through different sites or travel agents.”
Going on an international vacation? How to use Rs 7 lakh TCS threshold
TCS is not limited to overseas tour packages. You will have to pay the tax even if you remit money from India. Now, there is no TCS for remitting up to Rs 7 lakh in a financial year. But if you remit more than Rs 7 lakh a year, TCS of 20% will be levied from October 1, 2023, except in certain cases. There is no TCS on debit cards and credit card spends of up to Rs 7 lakh in a financial year. “The threshold of Rs 7 lakh applies qua remitter,” says Agarwala.So, when going on an overseas trip with family or as part of a group, different people can book different things and take advantage of the Rs 7 lakh limit. For instance, one person in the group can pay for the flight and another for the hotel accommodation. “Make prudent use of the Rs 7 lakh exemption limit per individual per year for TCS. If two individuals are travelling, consider dividing the forex amount between them,” says Sudarshan Motwani, Founder & CEO, of BookMyForex.com.
No TCS on international credit card transactions
As of now, there is no TCS on international credit card transactions. “Currently, international credit cards do not incur TCS, unlike regular credit cards. Opting for an international credit card for your foreign trip expenses can help you sidestep the additional tax liability,” says Rikant Pittie, Co-Founder , of EaseMyTrip. However, do remember the additional charges that come with a credit card transaction before swiping it abroad.
Limit of Rs 7 lakh for the purchase of an overseas tour package is independent of the LRS threshold
The overall limit of Rs 7 lakh is a combined threshold for all categories under the liberalised remittance scheme (LRS) payments for all modes of payments, regardless of the purpose. So even if you pay via a debit card for one trip and make payments via bank transfer on another, TCS will be levied if the total amount exceeds Rs 7 lakh in a year. However, the threshold of Rs 7 lakh per financial year for the purchase of an overseas tour package is independent of the LRS threshold.
Explaining it further, Sajish Pillai, Managing Director & Head-Assets and Strategic Alliances, Consumer Banking Group, DBS Bank India, says, “There are two distinct thresholds for TCS under LRS and for the purchase of overseas tour packages. The threshold for TCS under LRS is Rs 7 lakh. The threshold of Rs 7 lakh for a reduced rate of 5% TCS applies for the purchase of overseas tour programmes. The Finance Ministry has clarified that these two thresholds apply independently.”
Let’s understand it better with examples
For instance, A books an overseas tour package of Rs 5 lakh in November. In January, he goes abroad for a medical treatment of Rs 4 lakh. In February, he again booked a tour package worth Rs 4 lakh. How much TCS will be deducted? Who will collect it?
“The threshold of Rs 7 lakh applies separately for remittances made under LRS and for purchase of overseas tour packages. For LRS, the threshold of Rs 7 lakh is to determine whether TCS is applicable. For purchase of an overseas tour package, the threshold of Rs 7 lakh applies to determine the applicable TCS rate as 5% or 20%,” says Divakar Vijayasarathy, Founder and CEO, DVS Advisors.
The tax shall be collected as follows, Pillai says: On the November package of Rs 5 lakh, TCS will be levied at 5%. So, A has to pay TCS of Rs 25,000. The TCS will be collected by the “seller” of the overseas tour package, he adds.
A must furnish an undertaking to the seller that more than Rs 7 lakh has been spent on overseas tour packages thus far in the financial year concerned. This undertaking enables the seller to apply a lower TCS rate, says Agarwala of Nangia Andersen India.
For the medical treatment trip, TCS would apply at 5% if the amount exceeds Rs 7 lakh. But as A has only spent Rs 4 lakh through the LRS route, no TCS will apply, explains Pillai. “However, A is required to provide an undertaking to the authorised dealer or bank stating the purpose of the remittance and affirming that it does not surpass the Rs 7 lakh threshold,” Agarwala adds.
Then comes the February tour package or Rs 4 lakh. Here, A will have to pay TCS at 5% on spending up to Rs 7 lakh on tour packages in a financial year, and TCS at 20% on the amount above that. So the November and February amounts (Rs 5 lakh and Rs 4 lakh, respectively) will be used for calculation.
So for the February trip, A will have to pay TCS at 5% on Rs 2 lakh (Rs 7 lakh threshold minus November’s Rs 5 lakh) and TCS at 20% on the remaining Rs 2 lakh of the tour package amount.
Here is another example: B books an overseas tour package of Rs 6 lakh in October and another tour package worth Rs 4 lakh in January. How much TCS will be deducted? Who will collect it?
On the first booking of Rs 6 lakh, the seller will collect 5% TCS. To qualify for the reduced TCS rate, B must furnish an undertaking to the seller confirming that no amount over Rs 7 lakh has been spent on overseas tour packages in the financial year concerned. This undertaking enables the seller to apply a lower TCS rate.
“For the overseas tour package costing Rs 4 lakh in February, Rs 1 lakh (Rs 7 lakh threshold minus October’s Rs 6 lakh) will be subjected to TCS at 5%, and the remaining Rs 3 lakh (February’s Rs 4 lakh minus the balance of Rs 1 lakh in the threshold) will be subject to TCS at 20%. The seller of the overseas tour package is responsible for collecting TCS. The bank also has the option to request an undertaking from the customer to collect information on previous remittances,” says Pillai.
Will TCS be levied if you book international trips from foreign websites?
Nowadays, several people book flight tickets, hotels and sightseeing trips through foreign travel portals for international trips. Are such bookings also subject to TCS? Ankit Jain, Partner, Ved Jain & Associates, says, “The law has not clarified whether foreign websites are also required to collect TCS from Indian users. However, to my knowledge, no foreign website is planning to collect TCS on tour packages.”
Raju Kumar, Tax Partner, EY India, says the primary obligation to collect TCS on purchase of overseas tour packages falls on the seller of the package.
Now, if you are planning to use an international website to avoid TCS, be cautious of fraudulent platforms. Don’t fall prey to online scams to save some pennies.
There are some ways individuals can protect themselves from such foreign websites. Rikant Pittie of EaseMyTrip says while booking international trips using an overseas online platform it is better to comprehensively check the website before making payments. Look for customer reviews and ratings, and check for warning signs of fraudulent activities. Verify that the website employs secure payment gateways. Trusted payment options such as Visa, Mastercard or PayPal are better, says Pittie. Also, ensure that the website possesses a valid SSL certificate and uses HTTPS encryption for secure data transmission. Confirm whether the website provides valid contact details such as a physical address, phone number or email address, he adds.
TCS is not an additional tax
Lastly, remember that TCS is not an additional income tax. You can adjust the amount deducted as TCS against your tax liability while filing the income tax return (ITR). If you have no tax liability, you can get the TCS as refund. But paying TCS can create a cashflow crunch as the amount is blocked till you get the refund.