A Comprehensive Guide to Remittances for NRIs

For NRIs, remittance means sending money from their country of residence back to India or transferring funds for various expenses. It is crucial for the financial well-being of families and communities living abroad. For many Non-Resident Indians (NRIs), sending money is more than just about helping their family: it often provides essential income that supports households in developing countries.

An NRI gets several options for sending money to India, mainly using online money transfer, bank wire transfers, money transfer operators, etc. With more options for money transfers available than ever before, an NRI must understand how remittances work.

In this blog, we will explain key points of sending money home, including important terms, and what legal and tax terms you need to know.

What is Remittance?

The word "remittance" is derived from the word "remit, meaning to send back. When talking about remittance in financial terms, it means sending money to family and friends living abroad. This is mostly done by people who work in a foreign country and send a part of their income back home to their families.

These remittances sometimes act as a primary income source for families living in a slow-growth economy and developing countries. It helps families meet basic needs and invest. It also helps during times of disasters by providing help in disaster relief funds.

Remittances are commonly made via digital money transfers and can be done by the electronic payment system provided by banks or through money transfer services.

What are the Key Remittance Terms You Must Know?

Understanding the main remittance terms is important for anyone who is sending or receiving money across borders. Here are some of the important key remittance terms you must know:

Inward Remittance

Inward remittance is the process of receiving money into your local savings account from abroad. It allows NRIs to transfer funds to support family, invest in assets, pay for services, or manage financial responsibilities back home. It is regulated by the India RBI under FEMA laws.

Your foreign currency gets converted into Indian rupees via official banking channels when you initiate an inward remittance to India.

Outward Remittance

Outward remittance is the process of transferring money from India to another country or region through authorized banking channels. Generally, these transfers can be made only for the purposes listed by the Foreign Exchange Management Act (FEMA) of 1999. It includes sending money to cover tuition fees or living expenses, pay for medical treatments, buy assets, etc.

The framework for such transactions is provided by the Liberalised Remittance Scheme (LRS), which allows residents to transfer up to 250,000 USD per financial year for various approved purposes. For NRIs, the remittance limit is higher.

Authorised Dealer (AD) Bank

Authorised Dealer (AD) banks are commercial banks and financial institutions that are authorized by the RBI (Reserve Bank of India) to handle foreign exchange transactions. The primary function of these banks is to serve as intermediaries for NRIs, Indian companies, and foreign businesses in managing cross-border financial transactions and ensuring compliance with the regulatory framework.

A bank is not allowed to process cross-border payments without this authorization, whether it is for imports, exports, or investments.

NRE and NRO Accounts

NRE (Non-Resident External) accounts hold foreign income in India, offer tax-free interest, and allow full repatriation, while NRO (Non-Resident Ordinary) accounts handle India-sourced income (rent, dividends) are subject to Indian taxes, with a limited repatriation limit of 1 million USD per year.

Both accounts are rupee-denominated, but NRE funds come from abroad (converted INR), while NRO funds are Indian income.

Repatriation

Repatriation is legally sending money out of India, typically for NRIs from their NRO account to their overseas account after fulfilling FEMA (Foreign Exchange Management Act) rules and paying the applicable taxes.

TCS/TDS

Tax Collected at Source under Section 206C (1G) applies to certain outward foreign remittances, while TDS (Tax Deducted at Source) applies to various types of Indian income.

Checklist to Consider Before Sending Money to India as an NRI

Keep the following things in mind before sending money to India as an NRI to ensure compliance, accuracy, and prevent delays:

Confirm Your Residential Status and Accurate Bank Accounts

• Make sure that your Indian accounts are correctly tagged as NRE/NRO under FEMA, and ensure that your KYC is updated as NRI (Non-Resident Indian) with the bank.
• For large foreign credits, avoid using an old resident savings account, as this can lead to non-compliance queries from FEMA.

Select the Right Receiving Account (NRE vs NRO)

• Use NRE (Non-Resident External) accounts for remitting savings from foreign salary or investments that need full repatriability  and tax-free interest.
• Use an NRO (Non-Resident Ordinary) account for Indian income, like rent, dividends, or pension, or where local spending and rupee usage is the main goal.

Keep Main Documents Handy

• PAN, passport, and overseas address proof. Additionally, in some cases, source-of-funds documents may be needed for large remittances.
• To satisfy AML and FEMA checks, the banks may request additional declarations for very large or frequent transfers.

Clarify Purpose Codes and Limit Implications

• Each remittances need to carry a correct purpose code, which the banks will report to the RBI. It could be family maintenance, investment, education, etc.
• For residents using the liberalised remittance scheme (LRS), tax collected at source (TCS) applies beyond the specific threshold. NRIs who are remitting from abroad to India generally don't face Indian TCS on the inflows.

What are the Available Remittance Channels?

Choosing the right remittance channels for sending money to India is important. This is because it will directly impact how your family or friends will receive it. For transferring the money, you get several options with each offering various benefits based on your requirements. Here are the available remittance channels for you to send money to India:

• Cross-Border UPI: This technology has facilitated the process for NRIs to send money to India. Although there is a daily remittance limit of Rs. 1 lakh, this option offers instant credit with more security via VPA-based payments.
• International Money Orders: It works better for smaller amounts or when your recipient doesn't have a bank account. It offers reliability through postal services like India Post. 
• Money Transfer Operators: MTOs offer flexibility through both online platforms and physical agent locations, such as Western Union and MoneyGram. These services are ideal for urgent needs, as your family can receive the money within a few hours. It also allows cash pickup even if the recipient lacks a bank account, helpful for quick family support during emergencies.
• Foreign Currency Checks/Drafts: These are physical payment instruments that provide a tangible form of security. However, it comes with significant disadvantages, including longer processing times (15-45 days), potential for loss, and higher processing fees.
• Bank Wire Transfers: Bank wire transfers are highly secure, great for large transactions like purchasing a property. They don't have any upper transfer limits, making them ideal when you have to transfer higher amounts from the USA to India. However, they charge higher fees and have a slower processing time of 1-3 business days as compared to online alternatives.
• Online Money Transfer Services: This option has become popular because of its efficiency and competitive exchange rates, along with lower fees as compared to the traditional methods. Services such as Wise offer transparency with mid-market rates, while Xoom (PayPal's service) provides faster processing times. You can transfer money anytime using your smartphone, and many services may complete the transactions within just a few minutes.

What are the Taxation and Compliance Requirements for NRI Remittance?

Many NRIs wonder and get confused, thinking, "Is there any tax on the money I send to India?" Now, the answer to this question depends on whether the amount is your own foreign income being remitted or taxable Indian income being transferred. Let's understand this situation in detail:

Remitting Your Own Foreign-Earned Money to India

Simply transferring your after-tax foreign salary or savings from an overseas bank account into your Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account in India generally does not, in itself, create a fresh Indian income tax liability.

Tax implications arise only when there is India-sourced income or when you become an Indian resident. The FEMA (Foreign Exchange Management Act) allows NRIs to remit such freely via normal banking channels. However, this is subject to KYC and source-of-funds checks.

Taxation on Income Generated in India (in NRO account)

Any income credited into an NRO account is subject to taxation in India, including interest, rent, and capital gains. Additionally, banks generally deduct TDS (Tax Deducted at Source) at applicable rates for NRIs.

Before transferring from an NRO to an overseas account (beyond current income). NRIs generally require a CA certification (Form 15CB) and Form 15CA filing to confirm that the taxes have been paid.

When Do TCS and LRS Apply

TCS (Tax Collected at Source) under section 206C(1G) applies on outward remittances from India under LRS (Liberalised Remittance Scheme) by residents, not on NRIs sending money from abroad into India.

Also, clarifications note that NRO-to-overseas remittances under the 1 million USD schemes for NRIs are not considered as LRS remittances and thus, they are not subject to TCS. However, the underlying income must still be properly declared and taxed in India according to its nature.

FEMA Reporting and Limits

Inward remittances must be coded properly and routed via authorised channels: some business or large transactions may attract reporting obligations for banks under the directions of FEMA and RBI.

NRIs repatriating funds from an NRO account to overseas accounts must respect the overall annual ceiling, which is commonly up to 1 million USD per financial year for eligible assets. However, this is subject to documentation and tax compliance.

Final Thoughts

As an NRI, managing your remittances doesn't have to be complicated or hard. You can make the process easier by understanding the basics. Problems can be avoided by understanding the rules, whether you are sending money to support your family or for investment in India. Additionally, to get personalized help with your remittance while staying compliant with Indian tax rules, reach out to the experts at Savetaxs.

We have a team of experts who can assist you with remittance by offering comprehensive tax and compliance support, mainly for NRIs. By choosing us, you can ensure that the entire process is legal, tax-compliant, and stress-free. Contact us today, as we are working 24*7 across all time zones.