Do you love exploring new destinations and have a huge bucket list of places to visit? While you plan your itineraries and travel budgets, you may have not paid too much heed to an important aspect of travel — taxation.
If you are an Indian resident and have gone on a foreign trip in the recent past or planning one in the future, it is important that you keep yourself updated about foreign travel expenses deductible in India. Foreign travel expenses are not deductible but domestic travel expenses are deductible if you are an Indian taxpayer and claim Leave Travel Allowance or LTA, under the Income Tax Act, 1961.
Let’s first look at international travel. Before you start making up your itinerary, you would need to know the tourism tax definition. Several countries have introduced this concept of travel tax laws so as to boost the tourism sector while others have brought in tourism tax to curb over-tourism. Sometimes, certain destinations that are ecologically sensitive regions such as biodiversity hotspots impose a travel tax to deter visitors as well. Nevertheless, the purpose of travel tax is to raise funds; these could be in the form of hotel tax, restaurant tax or even arrival tax for international visitors. As a tourist from India, you would need to shell out these taxes and expenses from your own pocket as they are not deductible. However, there are some rules on tax collected at source and whether you would need to mention your foreign travel expenses in ITR (income tax returns) that you need to be aware of.
Is it mandatory to mention about foreign trip in income tax return(s)?
If you are travelling abroad, you would need to provide details if you have spent more than Rs 2 lakh on your foreign travel. This (spending Rs 2 lakh or more) makes filing income tax mandatory. If the taxpayer has spent for others, for example, family members or friends too, the foreign travel expenses allowable for tax returns remain the same. The person has to disclose details if more than Rs 2 lakh has been spent. This expenditure can be made in foreign or Indian currency. This rule will also apply to business and personal trips.
The ITR Form 1 has included a column for assessees to provide information on foreign travel exceeding Rs 2 lakh because this will mean tax filing is mandatory even when the taxpayer may not have a taxable income. ITR Form 4 also has space for the provision of this information. ITR -1 Sahaj is used by residents whose total income doesn’t cross Rs 50 lakh while ITR-4 Sugam is for individuals, Hindu Undivided Families (HUFS) and firms barring LLPs with a total income of up to Rs 50 lakh and presumptive income from profession/business. These two forms also ask for taxpayers’ passport numbers.
TCS rule for income tax on foreign travel
Another income tax on foreign travel rule pertains to TCS. You would need to keep in mind that in October 2020, a new rule was brought in wherein tax from those who have opted for foreign travel packages will not be based on the amount the seller has collected from them. So, if you have bought a foreign travel package worth Rs 5 lakh or Rs 3 lakh, the tax that will be charged is on the full amount. This tax is deducted/collected at the source. This is called TCS and is defined as the tax that a seller needs to pay after he/she has collected the same from the buyer at the time of the sale. The booking needs to be done from India for residents to pay TCS on the foreign tour packages.
Section 206C of the IT Act looks into the goods/packages on which sellers can collect TCS from buyers. The provisions pertaining to foreign travel are applicable under a new sub-section (1G) under Section 206C of the Income Tax Act. The new subsection of 1G was brought in by the Finance Act 2020.
The liability to collect TCS for overseas travel programs is not applicable only if you as a buyer belong to the state or central government, embassy, consulate or commission, high commission or a trade representative of a foreign state. If you are a local authority or have been specified by the central government through a gazette notification too, your foreign travel expenses are not liable for TCS.
TCS rates on foreign travel
The TCS will be collected by the seller of the foreign tour package at 5 per cent if the buyer has furnished PAN card details. If the buyer doesn’t, then the TCS is 10 per cent, as per Section 206CC. The tax collected is on the full amount of the package.
The tour operator would need to deposit the TCS against your PAN and this will be reflected in Form 26A much like other tax credits or TDS. If the TCS exceeds your tax liability, you can file your IT returns and seek a refund.
Also, in case your booking is cancelled but the operator has already collected the TCS, there is no scope for reversal. As a buyer, your option is to claim this money as a refund upon filing your IT returns.
These rules won’t impact you much as a regular income tax payer except that you may have an outflow of extra cash while making your foreign tour bookings. You can always seek refunds if the TCS exceeds your tax liability. However, if you have not filed your IT returns otherwise owing to the fact that you have an income from agriculture, for example, you will now have to file your tax returns to get a refund.
The reason for rules pertaining to the Rs 2 lakh threshold on foreign travel expenses allowable for tax returns is to keep an eye on big spenders. The TCS rule, the mandatory filing of IT returns for those spending more than Rs 2 lakh and the collection of passport numbers all have been brought in to keep track of those spending big on foreign travels.
Travelling within India?
If your wanderlust is limited to Indian destinations, you can always claim your tax deduction for travel expenses under LTA. However, other expenses such as accommodation, entertainment or sightseeing are not covered for tax deductions.
Now that you know all about income tax on foreign travel, you will be able to understand exactly how much TCS you may need to pay when you book a foreign tour with an operator. You will also know that you would need to file your IT returns so you can claim your refund if the TCS exceeds your tax liability. This makes you not just a more informed taxpayer but also a better-informed traveller.