Transferring money to and from India is expensive. There are many transaction costs involved, including the currency spread (the difference between a bank’s buying and selling rate), bank commission, and GST (goods and services tax). In this article, we’ll explore what these fees are and how you can reduce them.
A bank or financial institution charges a difference between the buying and selling price of a foreign currency. For example, if the US dollar is trading against the Indian rupee at 75, a bank will sell you the dollar at 78 and buy the dollar at 72. These spreads can be 4-5% on what is called the “card.” . bank rate ”or“ rack rate ”. The higher spreads are usually taken by stockbrokers at airports, but the spreads are also taken on wire transfers for things like investing in international stocks, transfers for education, gifts or l ‘interview.
Beyond the spread, a bank will charge a commission. On this commission, a GST of 18% is charged (9% CGST and 9% SGST). So if you transfer ??10 lakh in US the bank might charge a commission of ??500. On top of that, you have to pay 18% GST, which amounts to ??90.
GST on currency conversion
Goods and Services Tax (GST) becomes payable on currency conversion in addition to GST collected on bank commission. The amount of GST is levied on what is known as the “assessed value” of the transfer. This taxable value is 1% for transfers up to ??1 lakh, 0.5% more ??1,000 on transfers of ??1 lakh to ??10 lakh and 0.1% more ??5,500 on the above transfers ??10 lakh, capped at ??60,000. For example, if you transfer ??25 lakh, the assessed value will be ??5,500 + 0.1% of ( ??25 lakh- ??10 lakh). It comes to ??7,000. The GST is then levied at 18% on ??7,000 who comes to ??1260. So suppose that the bank charges a commission of ??500 (with 18% GST) and spread of ??1 lakh. Adding up the commission, spread and GST you will end up paying ??1 01 850 as fees in your transaction ??25 lakh. Spread is usually the largest part of these costs and can be reduced as shown below.
Tax collected at source
Indian residents are allowed to transfer up to $ 250,000 per year for purposes such as investing in foreign stocks or funds, education, parenting, and tourism. However, the bank or the trader will deduct the TCS (tax collected at source) at 5% on transfers over ??7 lakh per year. This TCS can be deducted from other taxes you owe, but it becomes an upfront cost to you.
In the case of the GST and the TCS, there is nothing you can do to reduce them. However, you can work on fees such as currency spread.
Sitashwa Srivastava, founder of Stockal, an international investment platform for Indians, suggests a few methods to lower your transaction costs.
“First of all, if you’re sending money online, do it during banking hours. Banks tend to have higher spreads outside of these hours. Second, call your relationship manager. You can negotiate a better deal than the going card rate with the bank concerned, “he said. Without negotiation, the bank will convert your money according to its standard” card rate “, which will usually have high spreads. Srivastava has also added that you can search for suppliers. “Small banks like RBL or IDFC First or third-party transfer agencies like Western Union and Xoom (a Paypal service) might offer you more competitive rates,” he said. Finally, according to Srivastava, if you are transferring money for investment in global stocks or bonds, going through a platform might help.
“Platforms like ours have links with banks, which gives preferential rates to our customers,” he added.
Viram Shah, CEO of Vested, another international investment platform, added that you can only go through non-bank third-party agents for education and travel transfers, among others. These are considered as current account transactions. “If you invest in stocks or international bonds, you have to go through a bank in India. While withdrawing money as well, it must arrive at your bank in India, “he added.
“The commission and the spread change considerably depending on the size of the shipment,” said Vikas Gupta of Omniscience Capital. “Higher amounts lead to lower fees and these can be reduced through negotiations with the banker. As a general rule, do not go for international investment through the liberalized funds transfer system (LRS) if you have less than $ 5,000 to invest, “he added.
You can trade down a bank’s currency spread and avoid small currency transfers to keep costs down. Make sure you take into account the various costs and taxes involved before making a foreign exchange transfer.
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