A Detailed Guide on Remittance
By Jupiter Team · · 5 min read
A remittance is a payment made by one party to another. Broadly, it includes all types of payments like invoices or bills.
Generally, this term is used to describe the money sent by individuals who work abroad to their families in their domestic country. Read on to know more about it.
What is a remittance?
It is a money transfer wherein one party sends funds to another party (either individual or a business). Generally, these payments are done via wire submissions or electronic transfers.
Often, such transactions are international and can be quickly completed. Many people working abroad use this payment method to send money back home to their families.
Remittance payments are also used to provide aid to developing countries and these comprise a part of the receiving country’s Gross Domestic Product (GDP).
Often, such payments also represent one of the largest sources of earnings for people living in low-income and developing countries and can exceed international development assistance and direct investments.
How does remittance payment work?
There are multiple ways in which such payments work. Some factors that influence the remitters' decisions include transaction costs, bank account access, the need for quick payments, and their preferences.
Irrespective of which method is used, these payments follow a basic completion route.
While initiating the transfer, the remitter must have the desired amount in their bank account. After issuing the payment, the money is transmitted by the receivers' banks for processing.
When the receivers' banks have the amount, the applicable banking fee and currency exchange rate are applied.
The funds are then available in the receivers' accounts in their local currency after the applicable charges are deducted from the remitted amount.
Is remittance taxable in India?
The rules governing the taxation of such transfers vary from one country to another. In India, the taxation is based on the type of payment, which is as below:
Money received in an Indian bank account from relatives based abroad is known as inward remittance, which is governed by the Foreign Exchange Management Act (FEMA).
The amount is not taxable only if it is for meeting living expenses, medical treatment, education, donations, travel expenses, and gifts. However, if the receivers invest this money, any income generated from such investment is taxable.
As per the RBI guidelines for inward remittance (Reserve Bank of India) and FEMA, the following members can receive tax-free money:
- Senders’ lineal descendants and ascendants
- Spouses’ lineal descendants and ascendants
- Spouse of the aforementioned
- Senders’ spouse
- Spouses’ siblings
- Senders’ parents’ siblings
Any amount transferred outside the country is known as a foreign outward remittance.
Parents sending money to their children studying abroad is one such example. Under the Liberalized Remittance Scheme (LRS), all Indian residents can remit up to $250,000 during the financial year to any authorized capital or current account.
As per the new sub-section 206C (1G) of the Finance Act 2020, all remittances under LRS are subject to a 5% Tax Collected at Source (TCS). The TCS is levied at 0.5% if the amount is paid as an installment for a higher education loan.
What is remittance advice?
Suppliers may get a remittance advice letter from customers. This document is proof that the invoice payment is complete.
This letter is generally given by the customers at the time of making the payment. Some vendors may include this section within their invoices, which are then signed by the customers and duly returned.
Sending this letter is not mandatory while transferring money. Nonetheless, it helps suppliers to match the amount received with the invoice and maintain their records.
With the increasing use of electronic transfers, the practice of sending such advice is reducing; however, it continues to be adopted when payments are made via checks.
How to send remittance advice?
While sending the advice letter to the suppliers, customers should include the following details:
- Invoice number
- Payment date and expected date of receiving the money
- Payment amount and method
- Suppliers’ complete name and address
- Customers’ name and address
There are no regulatory guidelines on how to send this advice letter. The most commonly adopted practice is to send it via email.
The advice slip can also be sent via mail as a letter, which is common when payments are made with checks. If the supplier has provided the advice letter section, the customer can fill it and return it to the given address.
What are remittance payment methods?
There are multiple ways in which such payments can be made. The following are some of the commonly used methods to send money.
Senders provide their routing and account number details, and the money is directly debited from their bank accounts.
It requires completing some validation process and may take a few days, which may not be a viable option for individuals who want to remit the money quickly.
Credit card payments are instant and are beneficial to remit money without any delay. However, there may be some charges that have to be paid for such transfers.
Another alternative is debit cards, which also entail a fee (it may be lower than credit card charges). However, the money must be available in the sender’s bank account to make payments via debit card.
It is a popular method and money from the sender’s bank account is wired to the service provider. The sender will have to visit the branch to fill out a form, which can be cumbersome.
Additionally, the bank will levy certain charges on wire transfers.
The payment is made via a cheque, which although antiquated, has certain benefits. It provides a clear payment trail, making it easier to track if needed.
However, there can be possible human errors, which may increase the time due to the re-issuance of a rectified cheque. Moreover, cheque clearing takes longer than other payment methods.
Automated clearing house (ACH)
It is an electronic form of check payments. The money is debited from the sender’s bank account and credited to the receiver’s account. The method is suitable for recurring payments and requires a one-time setup.
How to use foreign outward remittance to send money abroad?
As per the RBI guidelines for outward remittance, Indian residents can initiate international transfers through an electronic payment system via banks or other money transfer service providers.
Certain fees are applicable to such fund transfers. The money is remitted via secure banking networks, which reduces the possibility of financial harm and fraud.
When the sender initiates the transfer, the recipient’s bank holds the amount while conducting compliance checks and completing the formalities. The receiver needs to provide the necessary documents to their bank to verify the details and ensure they are the intended beneficiary.
The entire procedure may take between one and two working days if the sender initiates the transaction before the cut-off time of their bank. First-time transactions may take between three and four working days to be processed and completed.
Senders must provide a government-issued identity card, permanent account number (PAN) card, and self-declaration stating their relationship with the beneficiaries to initiate the transfer.
The bank provides a reference number, which is required by the beneficiaries along with their identity proof to receive the money.
Inward and outward fund transfers are required for several purposes. Such transfers can be made in multiple ways. The choice of method depends on the fees, sender's and receiver's requirements, the urgency of the transfer, and convenience.
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