Invest in Credit Risk Mutual Fund or not?

Days after the government brought international credit card transactions under the $2,50,000 (~Rs 2 crores) LRS (Liberalised Remittance Scheme) limit, it has clarified that spending up to Rs 7,00,000 via international debit/credit cards would be exempted from this. In addition, the benefits provided for medical and educational purposes will not be affected by this.

These rules will be effective July 1, 2023. But what does this mean for you? Should you continue using them or look for other options? Here’s a detailed breakdown for you.

Credit, Debit and Prepaid cash cards : What should be your choice?

Before you make a decision on this, here’s what you need to understand. Under the current rules, you are charged a certain percentage of TCS everytime you remit funds abroad, even if it is within the LRS limit. Here’s a breakdown :

 Present and future TCS limits

1. For 0.5% TCS to apply for educational purposes, the source of funding should exclusively be an educational loan. Any other sources will attract a 20% TCS

   Should we shift to prepaid forex cards, then?
   Many people are now mulling using prepaid/preloaded forex cards for their foreign travel. Says Devyani Trivedi, who heads content at Rupicard, “During my last trips to Turkey, Bali, Sri Lanka, Thailand and Maldives, my average expenses fell below Rs 4,00,000. Yet, I always prefer preloading my BookMyForex Card and carrying physical currency, instead of using a credit card”.

   Prepaid forex cards are an easier way to carry foreign currency, without physically burdening your wallet. Prior to your travel, you can load it with the funds of currency you’ll need.

   Thereafter, like a regular debit/credit card, you can use it to transact normally, and even withdraw funds from an ATM. Depending on your needs, you can either opt for a single or multi-currency (allowing transactions in multiple currencies) forex card.

   In fact, they are considered to be a cheaper alternative to debit/credit cards, which charge a forex markup/ fees of up to 3.5%, everytime you transact from one currency to another. Many forex cards offer zero markup, which makes them a popular alternative.

   Tax implications

   For one, the 20% TCS rate is applicable even when you are converting currencies for international travel and carrying them physically. So, say you convert Rs 1,00,000 into USD. This comes to about $1,200. You will be required to pay Rs 20,000 as TCS on this Rs 1,00,000.

   The same stands true for forex cards. Mumbai-based CA Nitesh Buddhadev notes, “The new clarification by the government clearly states that only international debit and credit cards are exempted from paying TCS till Rs 7,00,000. Since forex cards do not come under that domain, even a single penny spent via such cards will attract 20% TCS”.

   For instance, if you preload your forex card with the same amount ($1,200), you will still be liable to pay Rs 20,000 as TCS.

   You can claim a full refund from IT authorities at the end of the year. Paying 20% TCS simply means you are blocking 20% of your transaction’s amount every time you pay. This can potentially mean a liquidity crunch.

   So, don’t jump the gun on your debit and credit cards for your international travel just yet, for they might be your best bet to save taxes!