LRS TCS and Overseas Travel: A Policy Design Critique

by Anirudh Burman.

Transaction taxes introduce frictions in transactions. Sometimes these frictions are in the larger public interest, for example, the interests of protecting government revenue ex ante because of the difficulty of ex post tax collection. In other cases, transaction taxes operate primarily to constrain transactions and their costs outweigh their benefits. A useful test is whether the tax (a) solves a genuine enforcement or information problem relative to ex post assessment, (b) is broadly designed and relatively neutral across comparable transactions, and (c) has stable, predictable parameters so that individuals can plan and comply without disproportionate costs. In addition, withholding taxes can be levied when there is a clear problem with ex post collection. However, the design of such taxes must still be proportionate to the objective and should not create large, avoidable liquidity and compliance frictions.

This post argues that the Union Government's Tax Collection at Source (TCS) on outward remittances under the Liberalised Remittance Scheme (LRS) and on purchase of an overseas tour programme packages fails these tests. It introduces a large, transaction-specific friction on outward remittances under LRS and on the domestic purchase of overseas tour programme packages. It does so without a clear statement of objective or a stable instrument design.

Introduction: TCS on LRS and overseas travel

TCS on LRS and on overseas tour packages was first introduced in the 2020 Union budget and the Finance Act, 2020. The Finance Act, 2020 inserted section 206C(1G) into the Income Tax Act, 1961 ( See Finance Act 2020 amendment here). The legal architecture in section 206C(1G) has two components. One is tied to an authorised dealer who "receives an amount for remittance from a buyer...", who intends to remit money out of India under the LRS. The other is a receipt-trigger tied to a seller of an overseas tour programme package. The second trigger is not a "remittance", which is conceptually confusing, since the move is primarily aimed at taxing cross-border movement of capital: LRS, a scheme under the Foreign Exchange and Management Act, 2000, allows overseas remittances up to USD 250,000 per annum, and the first component introduces a TCS on this, whereas the second component imposes TCS on overseas tour packages, independent of LRS. The second component introduces frictions for domestic purchases routed through Indian sellers.

Since the 2020 Finance Act, the Union government has tweaked this provision multiple times, adjusting tax rates, thresholds and exemptions. This years Union budget proposes to rationalise these further, but leaves the basic architecture intact.

Brief chronology of events

The table below shows that the instrument has been repeatedly redesigned along: (i) rates/thresholds and (ii) scope/coverage/definitions. This makes compliance and planning difficult for affected transactions.

Title of document (1)	Type of instrument (2)	Date (3)	What Changed (4)	Provision in the regulatory instrument (5)	Change type (6)
Finance Act, 2020	Law	March 2020	(a) introduced TCS on LRS remittances above INR 7 lakh per financial year (general rate 5%) (b) set concessional TCS rate of 0.5% for education remittance financed by an education loan (c) introduced TCS at 5% on sale of an overseas tour programme package (no threshold in the section text) (d) created exemptions where buyer is Government/embassy etc., or where buyer deducts TDS on the amount (as specified in the provisos)	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold; Scope/ definitions; Exemptions
Notification No. 20/2022 (S.O. 1432(E))	Notification	March 2022	(a) created exemption from TCS for an individual who is non-resident and visiting India	Income-tax Act, 1961: s.206C(1G) (Notification No. 20/2022)	Exemptions
Notification No. 99/2022 (S.O. 3878(E))	Notification	August 2022	(a) superseded previous notification and replaced the exemption category: TCS not applicable to a non-resident buyer who does not have a permanent establishment in India	Income-tax Act, 1961: s.206C(1G) (Notification No. 99/2022)	Exemptions
Finance Act, 2023	Law	February 2023	(a) continued TCS at 5% on LRS remittances for education and medical treatment in excess of INR 7 lakh (b) continued concessional TCS at 0.5% on education remittances financed by an education loan in excess of INR 7 lakh (c) proposed increasing TCS rates from 5% to 20% for other LRS purposes and purchase of overseas tour programme packages	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold
Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 (G.S.R. 369(E))	Regulation	May 2023	(a) removed exemption in FEMA Current Account Transactions Rules, bringing international credit card usage while outside India within Rule 5 (and therefore within LRS accounting), which can expand the practical ambit for TCS.	FEMA CAT Rules, 2000: Rules 5, 7	Scope/ definitions
Press Release (Ministry of Finance): Clarification regarding applicability of TCS to small Debit/Credit Transactions under LRS	Press Release	May 2023	(a) clarified that international debit/credit card payments by an individual up to INR 7 lakh per financial year are excluded from LRS limits and will not attract TCS	MoF Press Release	Scope/ definitions
Press Release (Ministry of Finance): Important changes w.r.t LRS and TCS (deferral and thresholds)	Press Release	June 2023	(a) superseded the 19 May 2023 clarification and postponed implementation of the 16 May 2023 FEMA amendment, keeping overseas international credit card spends outside LRS (and outside TCS) until further order (b) restored INR 7 lakh annual threshold for TCS across all LRS categories irrespective of purpose (c) specified post-threshold LRS TCS rates: 0.5% for education loan, 5% for education/medical, 20% for other purposes (d) specified overseas tour programme package TCS: 5% up to INR 7 lakh and 20% above, INR 7 lakh (e) deferred the increased TCS rates to October 1, 2023.	MoF Press Release: LRS/TCS	Implementation/ deferral; Rate/ threshold
CBDT Circular No. 10 of 2023 (Guidelines to remove difficulty in implementation of changes relating to TCS on LRS and overseas tour packages)	Circular	June 2023	(a) clarified that overseas international credit card spending is not treated as LRS for now, so no TCS on such spends till further order (b) clarified that the INR 7 lakh LRS threshold for TCS applies per remitter (not separately per purpose or per authorised dealer) (c) clarified category boundary for overseas tour programme package, standalone international air ticket or standalone hotel booking is not a "package" (package must include at least two specified components)	CBDT Circular 10/2023	Scope/ definitions
Circular No. 11 of 2023	Circular	July 2023	(a) no change to TCS rates/thresholds/categories/exemptions.	CBDT Circular 11/2023	Scope/ definitions
Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2023 (re-insertion of Rule 7)	Regulation	June 2023	(a) reinstated exemption in FEMA Current Account Transactions Rules, excluding overseas international credit card use from Rule 5 (and therefore from LRS accounting), reversing the 16 May 2023 omission	FEMA CAT Rules, 2000: Rule 7	Scope/ definitions
Finance Act, 2024	Law	February 2024	(a) Inserted a sixth proviso to s.206C(1G) governing TCS collection based on the pre-amendment position (as on 01-04-2023.	Income-tax Act, 1961: s.206C(1G) (sixth proviso)	Implementation/ deferral
Finance Act, 2025	Law	March 2025	TCS thresholds increased.	Income-tax Act, 1961: s.206C(1G) (threshold amendment)	Rate/ threshold
Finance Bill, 2026	Law	February 2026	(a) proposed reducing TCS rate for LRS remittances for education/medical treatment (above INR 10 lakh) from 5% to 2% (b) proposed reducing TCS on sale of overseas tour programme package to 2% and removing the threshold/slab so 2% applies irrespective of amount (c) retained 20% TCS rate for LRS purposes other than education/medical.	Finance Bill, 2026: s.206C(1G)	Rate/ threshold

Regulatory uncertainty

A predictable, stable regime is important for economic freedom. Economic freedom implies the ability to plan properly, and planning requires foreseeability and predictability. The table above discusses frequent regulatory changes to the LRS and overseas travel framework since 2020. The government has revised thresholds, exemptions, rates frequently, set different TCS rates for different categories of spends and revised them, exempted non-residents, included or excluded foreign credit and debit-card spends, clarified what purchasing an overseas tour package means, and so on.

This matters for economic freedom: individuals cannot reliably forecast the cost of lawful foreign transactions, intermediaries cannot standardise compliance processes, and the effective burden depends on the tax rate, on exclusions and exemptions, as well as whether refunds are timely.

TCS on LRS and overseas travel as a hindrance to economic freedom

LRS was introduced in 2004 as part of a broader liberalisation of Indian finance in 2004. Since then, the LRS limit has been increased gradually from USD 25,000 to USD 250,000. This liberalisation reduced frictions in the ability of Indians to transact abroad, purchase foreign goods and services, and contributed to India's global integration.

In 2020, the Finance Act introduced a friction of a 5 percent TCS, which it increased to 20 percent in 2023 for purposes other than education and medical expenses. The budget speeches of the Finance Minister in Parliament ( 2020-21 and 2023-24 ) do not provide any reasons for introducing this friction. TCS is collected at the time of transaction, regardless of eventual tax liability. TCS imposes a significant friction on such activity. By doing this, the TCS changes the set of choices individuals have by making certain specific uses and transactions costlier from the perspective of both compliance and financial liquidity. In addition, if refunds are delayed, the private cost is not 20%, it is the aggregated cost of the time value of money, the opportunity cost of having made other choices had this liquidity constraint not been imposed, as well as the friction and uncertainty of Indian tax compliance.

Finally, the effect of the TCS is distributional regressive. Individuals facing the highest liquidity constraints are hit the hardest (young professionals, small business owners, families with recurring expenses, etc.). While lower frictions for educational and medical purposes alleviate some of this, the remaining frictions impose invisible opportunity costs on many other types of potential activities.

Paying advance TCS on overseas travel

While the TCS on LRS taxes foreign remittances, the TCS on overseas travel taxes even domestic transactions.

It is important not to equate foreign remittances with domestic transactions. The state regulates cross-border outflows under FEMA and other regulations and has articulated some objectives for this (e.g., managing outflows, monitoring, national security), even if one disagrees with the choice of objective or the proportionality of the instrument. By contrast, domestic transactions already sit within a general indirect tax architecture (GST), whose design objective was precisely to subsume transaction taxes into a broad-based system.

The issue here is not whether cross-border remittances can ever be regulated or taxed, but whether a narrow, high-variance transaction friction outside the GST framework, where the tax is collected upfront regardless of eventual tax liability, represents a coherent and proportionate policy design.

CBDT Circular 10/2023, Question 8, states that "overseas tour program package" includes expenses for "travel" or "hotel stay" etc., and then clarifies that purchase of only an international travel ticket or only hotel accommodation "by in itself is not covered."

Though two of three conditions need to be fulfilled for this to be triggered, it effectively brings domestic payments within its ambit. If one buys an international flight ticket from a domestic airline or a domestic travel aggregator as part of an overseas tour, such domestic expenditure in INR will also be included within the threshold of the TCS. As drafted, this requirement seems to collect an advance tax on individuals spending within India's domestic economy for foreign travel, as well as any spends outside India. This is novel, as earlier prohibitions, even in the license-raj era focused on foreign transactions and remittances, not domestic consumption of goods and services for foreign travel. The use of tax-based frictions serves to reduce the average Indian individual's integration with the globalised economy. In addition, the continual changes discussed above also affect the predictability and forecasting of decisions within the domestic economy because domestic spends on foreign travel are also included within the ambit of TCS.

One possible defence of this TCS is that it is intended to reduce certain outflows, analogous to a Tobin-tax style tax on foreign exchange transactions. The analogy is limited. Tobin's proposal was to cushion exchange-rate fluctuations. It was also designed to disincentivise very short-term speculative round-tripping transactions through a small uniform charge on foreign exchange conversions. The TCS regime is significantly broader in coverage (household remittances and even a domestic purchase trigger for overseas tour packages) and has been set at rates (e.g., 20 percent for many categories) that are far from marginal.

The Finance Minister in her budget speech of 2026 has proposed to rationalise many of the tax rates under the TCS regime. The proposal to reduce TCS to 2 percent for certain categories moves the rate closer to the range conceptually associated with a low-rate transaction tax. The current budget proposal is welcome. However, the deeper concern is the instrument design: a transaction-specific levy that is collected upfront irrespective of final liability, without sectoral neutrality and predictability. A better course of action will be to only pursue those cross-border transactions where the Indian state has clearly articulated objectives in a neutral, low-friction, predictable manner. Absent this, the core concerns remain about the design, and the consequent inability for households to plan and execute their economic activities.

Anirudh Burman is a research at XKDR Forum.