From October 1, 2023, Forex cards will be charged 20% withholding tax (TCS) if the user loads more than Rs 7 lakh on the card in a financial year. Currently, TCS on Forex cards is 5% if you load more than Rs 7 lakh on the card. There is no TCS for international credit cards. Does this mean credit cards are a better option than foreign exchange cards when traveling abroad? Probably not always. Read carefully to find out more.
To figure out whether a credit card or a foreign exchange card is better for international travel, we need to understand the basic differences between these two and their fees.
Forex Card vs Credit Card: What are the Differences?
When you purchase a Forex card, the foreign exchange rate is locked as soon as you load money onto the card. In the case of a credit card, the applicable exchange rate will be paid at the time of the transaction. “With a Forex card, exchange rates are saved immediately when you load money. This can provide a sense of financial security against price fluctuations,” says Nishant Pitti, CEO and co-founder, EaseMyTrip. “On the other hand, credit cards may offer better exchange rates and accumulate reward points for future use, but may incur international transaction fees.” This can drive up the overall cost of foreign exchange transactions.
A zero markup fee on Forex cards could lead to greater savings when traveling
Forex cards have recently become very popular among travelers, and all thanks to the zero markup fee. If you use your credit card or foreign exchange card abroad, you will usually be charged a price that is higher than the actual transaction value, called a surcharge. Swiping a credit card outside India costs a cross-currency surcharge of 2-4% of transactions plus GST, while forex cards do not attract this fee.
However, keep in mind that the Forex card must be used within the currency it was loaded for. If a foreign exchange card is swiped outside the currency area, a foreign exchange fee of up to 3.5% of the transaction value will be charged. However, fees may vary from Forex card to Forex card. If you want to avoid this cross-currency fee, opt for multi-currency Forex cards. However, check with the issuer if this feature is enabled in your multi-currency Forex card. Some banks now do not offer foreign exchange surcharges for credit cards. One such credit card is the IDFC First WOW. There is no joining fee, annual fee or foreign exchange markup fee for international spending. However, you need a fixed-term deposit with the bank and a credit limit of at least 100% of the deposit.
Large and reputable banks often offer credit cards with high markups, says Sudarshan Motwani, founder and CEO of BookMyForex.com. “Many customers choose such credit cards despite the very high costs and in many situations customers simply use the credit cards they already have. This is certainly practical, but involves considerable costs.”
Credit Card vs Forex Card: Everything You Need to Know
| Type of expenses |
Credit card |
Forex cards |
| TCS levy | Inapplicable | 20% TCS on expenditure above Rs 7 lakh from October 1, 2023 |
| Forex markup | 2-4% plus VAT | Normally: zero |
| exchange rate | Dynamic – determined at the point of sale | Can be determined in advance (at the time of charging) |
| Convenience | Banks check your creditworthiness before issuing a credit card | Easy to get; Previous credit history is not required |
| ATM withdrawal fees | Come with high fees and interest rates | As a rule, a fixed price is charged. For example, 150-350 rupees per withdrawal |
| annual fee | Zero – Rs 50,000 plus VAT | As a rule, there is a small one-time issuing fee; Some companies don’t even charge an issuing fee |
| Travel insurance | In most cases complementary | NO |
| Reward | Can be as high at 7-8% | Typically up to 1% |
| Important point to remember | No hassle of redeeming | Redeem the unused amount on time, otherwise it will be blocked |
Source: ET Online and Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co.
Ideally, inform the bank before the trip that you will be using your credit card while traveling abroad; Otherwise, complications could arise later, experts said.
However, if you have a credit card with no surcharge, the overall cost would be lower. “Credit cards with no or low surcharges can be beneficial to travelers because they offer perks like rewards points, cash back and lounge access,” adds Pitti.
Credit card vs. Forex card: Which card can you use to withdraw cash from ATMs when traveling abroad?
If you withdraw foreign currency using a credit card at an ATM abroad, in addition to interest, you will also have to pay the foreign currency transaction fee, withdrawal fee or cash advance fee. When you withdraw money from ATMs abroad using a credit card, you will be charged a prepayment fee of up to 3.5% of the amount withdrawn, plus interest of up to 42% per year (up to 3.5% per month) on revolving Credit and the foreign currency transaction fee of up to 3.5% of the transaction value, depending on the card.
However, if the same transaction is made with a foreign exchange card, a flat cash withdrawal fee will apply, which is generally a fixed amount per transaction – and is much lower than the cash withdrawal fee charged by credit cards.
For example, Equitas Small Finance Bank’s Niyo Global Zero Forex Markup Debit Card charges a flat fee of Rs 110 plus GST for every ATM withdrawal. BookMy Forex – Yes Bank Multi-Currency Forex Card charges a cash withdrawal fee of 2% of the transaction amount for each ATM withdrawal. Note that the Niyo Global debit card requires you to open a zero balance savings bank account with Equitas. “An additional foreign exchange conversion fee will be charged if the currency withdrawn from the ARM is different than that on the Forex card,” says Vinay Bagri, founder and CEO of Niyo.
Amit Singhania, partner at Shardul Amarchand Mangaldas & Co, says ATM withdrawals using credit cards usually come with high fees and interest. “ATM withdrawals using debit cards also incur high foreign exchange conversion fees. Forex cards, on the other hand, have a set fee for ATM withdrawals and are usually the best option.”
Forex cards are easily available, but don’t leave the money behind after the trip
Most Forex cards are easily available online. According to Singhania, issuers typically do not check their creditworthiness when allocating these cards. You must be at least 18 years old, an Indian citizen and have a valid Aadhaar card, PAN card and passport. You can apply for these cards online. Most companies, including Niyo, offer virtual Forex cards. So prepaid forex cards are easy to buy. However, keep in mind that if you do not redeem the amount before it expires, your credit may be blocked.
When it comes to credit cards, banks check your creditworthiness before issuing a card. To get a credit card, it is not mandatory to open a savings account at a bank, and redeeming a balance is not a hassle. However, you must pay your credit card bill on time or you will have to pay hefty interest.
Additionally, Forex cards typically do not offer rewards or travel insurance. Most international credit cards come with rewards and additional insurance.
Forex cards have no annual fee or joining fee. However, you must pay a small one-time issuing fee. While credit cards usually have an initiation fee and an annual fee, the issuing bank usually only charges this if the user’s spending in a year is less than a certain amount.
Finally, you don’t have to pay TCS for a Forex card if you spend less than Rs 7 lakh per year. For spending less than Rs 7 lakh, a forex card with zero or low surcharge is a better option than a credit card when traveling abroad, says Singhania.
Credit card vs. foreign exchange card: Which should you use for international travel from October 1, 2023?
If you are traveling in a group and your expenses are more than Rs 7 lakh, use two foreign exchange cards with a limit of Rs 7 lakh each instead of debit cards. Since TCS is PAN card specific, a separate exemption limit of Rs 7 lakh applies to each person even if traveling in a group. So, no TCS cess will be levied up to a total burden of Rs 14 lakh.
No-surcharge credit cards could be useful for many, but read the terms and conditions carefully before using them.
“High-fee credit cards can offset their costs with additional benefits such as increased reward points, improved lounge access and comprehensive insurance coverage, so the decision depends on individual preferences and usage patterns. “Ultimately, the choice between credit cards and foreign exchange cards depends on personal needs and circumstances,” says Pitti.
It is important to note that these are general comparisons. The terms and conditions of each card may vary depending on the bank and card.
Source : economictimes.indiatimes.com