From family vacations to business trips, here's how large foreign expenses affect your taxes

Mint

7 days ago

Say you're planning a vacation abroad with your family. Your spouse, whose income isn't large enough to be taxed, books a ₹5-lakh overseas tour package using her bank account. You all have a great time and return refreshed.
A few months later your wife receives a notice from the Income Tax Department for not disclosing high-value transactions and not filing an income tax return (ITR). This comes as a surprise because your wife doesn't pay income tax.
So what happened? Well, if you conduct a high-value foreign transaction it doesn't matter that you don't pay income tax. According to the seventh proviso to Section 139(1) of the Income Tax Act, even if your income is tax-exempt, you still need to file an ITR if you spend more than ₹2 lakh on foreign travel for yourself or anyone else. Tour operators or banks are required to report the PAN of the buyer in their statement of financial transactions (SFT) in case of high-value transactions. This is how the government finds out which people have large foreign expenditures but pay no income tax.
What about those who pay income tax and spend more than ₹2 lakh on foreign travel? They are not legally required to disclose foreign travel expenses in the ITR just because they exceed ₹2 lakh. "The seventh proviso to Section 139(1) only applies to people who are not otherwise required to file an ITR. The ITR forms will have the following column: 'Are you filing return under seventh proviso to section 139(1)?'. If you select 'No' (because you already have taxable income), it won't ask for the details of the foreign travel expenses," said chartered accountant Ashish Karundia.
TCS gives govt a peek at your foreign spends
However, be aware that your annual information statement (AIS) or Form 26-AS shows the travel spends. How does the tax department know details of your foreign spending? Simple – when you book an overseas tour package, your travel service provider is expected to deduct tax collected at source (TCS) from it. The TCS rate on overseas tour packages up to ₹10 lakh has been 5% since 1 April 2025 and 20% spends above that. The threshold for the 20% TCS was previously ₹7 lakh.
Similarly, banks and forex providers keep a track of your foreign transactions via credit and debit cards and forex purchases. Here, too, TCS is deducted at 20% (barring education and medical expenses) once the spending crosses ₹10 lakh. No TCS is deducted below this amount on card spends.
Banks and other service providers need to share this data with the tax department, and it shows up in your AIS and 26-AS. If your tax liability turns out to be lower than the TCS deducted, you will get a refund.
In practice, though, banks don't always deduct TCS on card transactions.
Harshal Bhuta, partner, P. R. Bhuta & Co. CAs, said, "TCS applies to all LRS transactions exceeding the prescribed threshold, regardless of the payment method – whether through outward remittances, loading of forex prepaid cards or use of international debit cards (in India or abroad) or use of international credit cards in India for LRS transactions.
'However, while credit card issuers generally don't collect TCS on international spends using credits cards at present, banks do collect TCS on international transactions using debit cards by debiting the customer's bank account. If the bank fails to collect TCS for any reason, the individual is not required to pay TCS directly to the government as there is no provision for self-deposit. Any penalties or interest for non-collection of TCS are levied on the collector (i.e. the bank) and not the individual."
What about foreign business trips?
If you go on a business trip abroad, more tax nuances come into the picture. The first rule is simple. If you have stayed abroad for more than 182 days (half the year) for work or business, you will be considered non-resident in India for tax purposes. This means you won't be taxed on your foreign income, only the income you earned in India.
Second, you need to be mindful of your visa type. If you travel abroad on a tourist visa, you are not allowed to work or do business. In that case, the 182-day rule as explained above may not apply. 'A recent ruling by a Chennai tax tribunal highlights that the type of visa matters. In a case where an Indian businessman traveled on tourist/social visas and stayed in India for less than 182 days, the court said the relaxed '182-day rule' (which typically makes you a non-resident) only applies if you left India for employment or business with the correct visa," said Prakash Hegde, a chartered accountant in Bengaluru.
So, even if you spend less than 182 days in India while visiting foreign countries on a tourist visa, you may still be considered resident in India if you stayed here for 60 days or more in that year. This means your worldwide income could be taxable in India.
Is per-diem taxable?
If your company sends you abroad for a business trip, it will generally cover your travel, food and other daily expenses. Reimbursements may not be feasible, so many companies pay a per-diem – a fixed daily amount – for expenses. The amount may depend on the location and designation of the employee.
Hegde said, 'Some people spend it all while others may save it. Companies may use it as a means to reward employees, too. Whether this amount is taxable for employees or not is disputed. A Karnataka High Court judgement says if the amount is reasonable, depending on the location and the standard of living of the employee, the tax department should not probe further. In other cases it may raise questions. Maintaining that fine line between reasonable and excess per-diem can be difficult."
Double taxation issues
Some business travellers may face double-taxation troubles. If a person travels abroad for the long term, he may become a taxpayer in the foreign country while still being a tax resident of India. In such a scenario, his global income may be taxed twice. How can he prevent this?
"You may not be able to prevent it in all cases, but you can try to reduce the extent of it. India has tax treaties with more than 90 countries. Depending on the treaty, the income taxed abroad may be exempt in India or the tax paid overseas may be eligible for reduction from the tax payable in India. In any case, one has to disclose it when filing the ITR," said Hegde.