International money transfer regulations in India explained
Apr 05, 2024
India undoubtedly is one of the most capital-driven markets in the world today. The economy is booming and we constantly see growth in different sectors and businesses every day.
This growth involves a lot of monetary transactions to and from different countries. 2022 is predicted to be a major milestone for India as according to a World Bank report, the country has received $100 billion in remittance transactions.
This is due to the evolving financial structure and systems that institutions have implemented and the international money transfer regulations set by the government.
International money transfer regulations - RBI’s role
RBI(Reserve Bank of India) is the central bank of India that was established on April 1, 1935.
The organization is the central authority in the country that controls monetary laws and policies to regulate activities by banking, non-banking, and other financial institutions.
They play a very crucial role in the domestic and international wire transfer regulations in and out of India.
The FEMA (Foreign Exchange Management Act, 1999) law was created by the parliament of India with the aim of bringing together and amending the policies related to foreign exchange and improving the systems and structures for external trade and payment to develop and maintain the forex market in India.
The RBI has the responsibility to ensure that the rules and laws set forth by FEMA are followed. If not, then they have the authority to take action against those that violate the rules and regulations.
The RBI is also capable of controlling the Indian rupee’s flow out of the nation to maintain the local currency market’s stability ensuring that there is no sudden outflow of money from India. They do this using various tools such as:
1. Interest rate policies
The RBI has the power to influence and adjust the rate of interest for holding the Indian rupee to make it more attractive than buying foreign currency.
2. Foreign exchange reserves
The RBI buys and holds certain foreign currencies such as the US dollar, Euro, and others as a reserve and uses them in situations where they might have to stabilize the value of the rupee by intervening in the foreign exchange market.
3. Quantitative controls
The RBI also controls the amount of money that any entity can send out of the country in a given period of time. These restrictions ensure the flow of the Indian rupee to international markets.
Apart from setting foreign money transfer rules in India, the RBI is also responsible for ensuring that money transfers don’t originate from crime or other illegal activities.
Understanding outward remittance rules in India
The Liberalized Remittance Scheme(LRS) was introduced by the RBI in India on February 4, 2004. It is a scheme that is aimed at helping people transfer money liberally and easily for different purposes.
Over the years the scheme has evolved with new international money transfer regulations and an increase in the maximum annual remittance limit of $25,000 to $250,000 at the present moment.
Under this scheme, businesses can transfer money internationally for the purpose of expanding a business, acquiring another business, or investing in a foreign company.
Individuals can also transfer for educational purposes such as fees, hostel fees, and other types of education expenses.
Remittances from India as per the LRS must be made from authorized dealer banks in India and you should have all the required documentation to be provided to the bank and RBI that is necessary for verification.
The scheme might be amended at irregular intervals. So it is always advisable to check with an authorized dealer or professional to be updated with the latest regulations and requirements for outward remittance.
Outward remittances by MNCs in India
Permitted category of outward remittances
Since globalization, many foreign businesses have set up their shop in India and are a part of a chain of businesses known as Multinational Companies(MNCs).
These businesses are allowed to transfer money internationally back to their home country or country of origin after they pay the appropriate tax that is applicable to the income they have earned in India.
Components of earnings that MNCs can remit back to their home country after paying tax include income, profits, dividends, etc. that are earned in India. Investments can also be transferred after paying the eligible taxes on them.
Outward remittances that are restricted
If investments are made in sectors like defense, then they have a lock-in period. So the MNC cannot withdraw, sell, or transfer the money held in such investments during the lock-in period.
What are the ways to make outward money transfers in India?
To initiate a bank transfer, Indian citizens and businesses can choose from four different wire transfer methods
1. NEFT
National Electronic Fund Transfer is a system set up, operated, and managed by the RBI. The payment mode is used for transferring funds from one bank account to another in a batch system.
This means that the transactions using NEFT are processed in separate batches throughout the day at regular intervals. This method of payment is usually used for small transactions and it is available to people through net banking 24x7.
The fees or charges for this payment depend on the amount you are transferring and the type of account you hold with the bank you’re transferring money. But on average, one can expect to incur anywhere from a few rupees to a few hundred rupees.
2. RTGS
Real-Time Gross Settlement System is a payment system that is used for high-value transactions and is processed as soon as it is received from one bank account to another. This payment system is active only during certain hours of the day.
This method is also operated and maintained by the RBI. The charge or fees for this payment method is usually between a few hundred rupees to a few thousand rupees.
3. IMPS
The Immediate Payment Service is a wire transfer method that is available 24x7 and is used for smaller value transactions. The charges for this type of transaction are anywhere between a few rupees to a few hundred rupees.
4. SWIFT
SWIFT is an international network of partner banks that is used to communicate and carry out transfer instructions using a system of codes.
This is a popular method for international transfers and the amount charged for this depends on the amount you’re transferring and the country you’re transferring to.
Understanding international money transfers to India
India has one of the highest inward remittance volumes in the world due to its growing economy and population. The RBI applies different rules and regulations when you transfer money from abroad to India.
The Rupee Drawing Arrangement(RDA) and the Money Transfer Service Scheme are both ways in which people and businesses can receive money from abroad.
There is no limit for inward personal transactions, but for businesses, there is a limit. When you use the MTSS route, you can receive a maximum of USD $2500 per transaction.
There is also a restriction of 30 transactions per financial year for a single recipient. An individual must create an NRE(Non-Resident External) account to receive foreign remittances. This type of account is exempt from taxes.
International money transfer for businesses with Volopay
Volopay is an all-in-one expense management platform built for businesses. With a modern payment infrastructure and robust systems, it helps businesses get the most out of their capital with smarter utilization of budgets across the organization.
Indian businesses can make use of the Volopay business account to make payments internationally and domestically. To know the business account opening procedure in detail, read our article, How to open a business bank account in India.
Additionally, when you use Volopay, you have access to all your payment transactions in real-time giving you complete visibility and control over your expenses.
Rather than having to rely on monthly bank statements, you get to make quicker decisions with all the data available to you instantly on a single dashboard.
International money transfers at zero cost and lowest forex charges
FAQs
Is international money transfer taxable in India?
Yes, international money transfer is taxable in India. The tax charged on outward remittance is known as TCS(tax collected at source). Money transfers upward of Rs. 7 lakhs are taxed at 5%(10% if you do not have PAN details). If the transfer is to pay off an education loan then it is charged at 0.5% (5% if you do not have PAN details).
How much foreign income is tax-free in India?
Businesses in India are taxed in the same way for foreign income the way they are taxed for income generated from within the country. No amount of foreign income is tax-free but there are certain deductions and exemptions that can be claimed to reduce the tax liability of the company.
What is the limit of international money transfers in India?
The limit of international money transfer for a business as per RBI and FEMA regulations is $25,000 USD in a financial year without needing prior approval from the RBI authorities. Any amount above that requires prior approval from the RBI, compliance with FEMA-permitted activities, following all the Know Your Customer (KYC) policies, and Anti-Money Laundering (AML) regulations.
How much do banks charge for international money transfers?
Different banks in India charge different rates for their international money transfer services. It could be a flat fee or a percentage of the amount you are sending. The fees will also depend on the amount, the country it is being transferred to, and the currency it is going to be converted into.
