A routine credit card renewal is becoming a regulatory concern for some wealthy Indians, with offshore banks in financial hubs such as Zurich, Singapore and London reportedly becoming more cautious about issuing or renewing international credit cards for Indian residents.
Some of these banks are reluctant to provide or renew such cards for resident Indians, and the issue is not necessarily linked to their creditworthiness.
Several offshore banks are reportedly reconsidering international credit cards for wealthy Indian customers because of India’s 180-day requirement for deploying funds remitted abroad under the Liberalised Remittance Scheme (LRS).
The issue is affecting cards that have already expired or are approaching renewal, according to the report.
At the centre of the problem is a regulation introduced in 2022, when the Reserve Bank of India revised the rules governing overseas investments under the LRS.
WHY THE 180-DAY RULE IS CREATING PROBLEMS
Under the LRS, resident Indians are permitted to remit up to $250,000 annually abroad for approved purposes.
However, conditions apply to money sent overseas. Under the “redeployment” requirement, residents must use or invest the remitted funds within 180 days. If the money is not deployed during that period, it must be returned to India.
Merely keeping funds in an overseas savings or current account does not qualify as deployment. Depositing the money in a fixed deposit with a foreign bank also does not meet the requirement.
Funds can qualify as deployed when they are used for permitted activities such as purchasing securities or property, or for current-account transactions including hotel bookings, air tickets and restaurant payments.
This creates difficulties for some wealthy Indians who maintain overseas banking relationships and use international credit cards connected to their foreign accounts.
Moin Ladha, partner at law firm Khaitan & Co, told The Economic Times that the 180-day requirement is creating an “unintended consequence” for the overseas banking relationships of Indian families because residents have limited flexibility to maintain substantial balances abroad.
WHY DO INDIANS USE FOREIGN CREDIT CARDS?
International credit cards issued by foreign banks can be particularly useful for people who frequently spend money abroad.
Because purchases can be charged in the local currency, users can avoid currency conversion costs. These cards can also be connected to overseas banking relationships, with spending limits determined by the foreign bank or card provider.
Harshal Bhuta, partner at CA firm PR Bhuta & Co, told ET that FEMA does not specify a separate monetary limit for remittances from India to settle dues on foreign-issued credit cards. Instead, the practical limit is the credit limit approved by the overseas bank or card issuer.
However, the 180-day requirement can make it difficult for some customers to maintain the overseas balances that foreign banks may expect as part of their banking relationships.
As a result, some banks are reconsidering whether they should continue providing these cards to resident Indians.
IT IS NOT NECESSARILY ABOUT CREDIT SCORES
An unusual aspect of the situation is that customers are not necessarily being viewed as higher-risk borrowers.
According to The Economic Times report, some offshore banks are becoming hesitant to issue or renew these cards even though the customers’ creditworthiness may not have declined.
Instead, restrictions on keeping unused funds overseas are making the broader banking relationship more complicated for certain institutions.
For wealthy Indians who have relied on these cards for years, the development could result in losing access to a facility that provides convenience and potentially lower costs while spending internationally.
FOREIGN CREDIT CARD SPENDING HAS ANOTHER ADVANTAGE
There is another regulatory difference that makes foreign-issued cards appealing.
Bhuta said that settling dues on foreign credit cards is not considered an LRS remittance under RBI guidance. Consequently, spending through foreign-issued international credit cards may remain outside the tax collected at source (TCS) framework that applies to certain LRS transactions.
This differs from foreign-exchange spending through credit cards issued by Indian banks, where the applicable tax framework covers specified forex transactions.
The report also points out that under FATCA and other information-sharing arrangements, foreign jurisdictions do not automatically provide India with details of every international credit card transaction.
However, this does not mean such spending is exempt from Indian tax or regulatory obligations. Instead, it demonstrates the regulatory difference between foreign-issued cards linked to overseas accounts and cards issued by Indian banks.
WHY MINORS WITH FOREIGN ACCOUNTS ARE ALSO AFFECTED
The issue extends beyond wealthy adults and also affects minors holding overseas accounts under the LRS.
Although minors are permitted to remit money under the LRS, they have fewer options for deploying those funds in ways that comply with the rules. According to the report, some overseas banks are therefore increasingly questioning whether certain such accounts should remain open.
Ladha said introducing some calibrated flexibility into the 180-day deployment requirement, especially for minors, could help address these practical difficulties without undermining the broader purpose of the LRS framework.
There is, however, another perspective.
Rajesh Shah, partner at CA firm Jayantilal Thakkar & Co, told ET that the rules governing remittances by minors have remained unchanged since the LRS was introduced in February 2004. His remarks come amid unconfirmed concerns that non-earning family members, including minors, could potentially be used to transfer more money than parents would otherwise be able to remit under the existing limits.
WHY ARE BANKS RECONSIDERING THESE CUSTOMERS?
For offshore banks, the concern extends beyond the credit card itself.
A foreign-issued card is typically part of a larger banking relationship. If an Indian resident is unable to keep substantial unused funds overseas because of the 180-day rule, maintaining that customer relationship may become less practical and economically attractive for the bank.
That appears to be prompting some banks in major offshore financial centres to reconsider such relationships.
The result is an unusual consequence: a regulation intended to ensure that funds remitted abroad by Indian residents are either actually used or returned to India is now affecting the availability of a financial product used by some wealthy Indians.
WHAT DOES THIS MEAN FOR RESIDENT INDIANS?
The development is particularly relevant to resident Indians who maintain overseas accounts or use international credit cards issued by foreign banks.
The LRS continues to permit eligible residents to send money abroad, but the 180-day requirement means those funds cannot simply remain unused overseas indefinitely.
For people using foreign-issued credit cards, the latest development could mean that a bank’s decision to issue or renew a card may depend not only on the customer’s creditworthiness but also on whether the overall overseas banking relationship complies with India’s remittance regulations.
For now, the issue appears to involve certain wealthy customers and specific overseas banking relationships rather than amounting to a blanket withdrawal of foreign-issued credit cards for all Indian residents.
