Foreign remittance is a crucial aspect of the global economy, allowing individuals to send money across international borders efficiently. Understanding how foreign remittance works is essential, especially for millions of expatriates who rely on these transfers to support their families back home.
In this comprehensive guide, we will explore how foreign remittance works, discuss foreign remittance process, highlight key challenges, and examine the latest trends and more in international money transfers.
Table of contents
What is Foreign Remittance?
Before understanding how foreign remittance works, let’s first define what foreign remittance is. It refers to the transfer of money from one country to another. This financial transaction typically involves individuals sending money to their home country from abroad, often migrant workers or expatriates supporting their families. Foreign remittances can also include transfers between businesses or governments across borders.
- The process of foreign remittance can be carried out through various means, such as bank transfers, online money transfer services, wire transfers etc
- The sender incurs fees and exchange rate costs during the transaction.
- Governments and financial institutions closely monitor and regulate foreign remittances to ensure transparency and prevent illegal activities such as money laundering and fraud.
How Foreign Remittance Works: Step-by-Step Process
Foreign remittance plays a vital role in global financial transactions, allowing individuals to send money across borders seamlessly. Understanding how foreign remittance works can help ensure a smooth, cost-effective transfer experience. Let’s breaks down the step-by-step process of how foreign remittance works, covering essential aspects such as sending funds, currency exchange, and receiving money.
1. Choosing a Money Transfer Method
Selecting the right transfer method is crucial for a secure and efficient transaction. There are several ways to send money internationally, including:
- Bank Transfers: A secure method where funds are transferred between banks across borders.
- Money Transfer Operators (MTOs): Companies like Western Union and MoneyGram facilitate quick transfers.
- Online Transfer Services: Platforms like Wise, PayPal, and Revolut offer low-cost digital remittances.
- Mobile Money Transfers: Services like M-Pesa provide easy money transfers via mobile networks.
2. Sending the Funds
To initiate a remittance, the sender must provide the recipient’s details, such as their name, bank account number, or mobile wallet ID. The sender also pays the transfer fees, which vary based on the service provider and transfer method.
3. Processing and Currency Exchange
Once the money is sent, it undergoes a conversion process based on exchange rates. Exchange rates fluctuate and can impact the final amount received by the beneficiary. Transfer service providers often apply a margin to currency exchange rates, making it essential to compare services before choosing one.
4. Receiving the Money
The recipient collects the funds through their designated bank account, cash pickup locations, or mobile wallets. Some transfers are instant, while others may take a few days, depending on the chosen transfer method.
Also Read: Looking for an easy inward remittance through an Indian Bank? Check out this blog on the best banks in India for Inward Remittance
What Are the Types of Foreign Remittances and How Do They Work?
Inward and outward remittances are types of foreign remittances, which involve the transfer of money across international borders. Inward remittance refers to money received from a foreign country, such as when an expatriate sends funds back home to their family. Outward remittance, on the other hand, is money sent to a foreign country, such as payments for international tuition, business transactions, or personal transfers.
Both inward and outward remittances play a crucial role in global financial transactions, supporting economies and facilitating international trade. Let’s explore them in detail and understand how these types of remittances work.
How Inward Remittance Works?
Inward remittance refers to the process of transferring money from a foreign country to India. This is a common financial transaction for Indian students studying abroad, who rely on financial support from family or sponsors back home. The Reserve Bank of India (RBI) closely monitors inward and outward remittances under the Liberalized Remittance Scheme (LRS). Here’s a step-by-step guide on how inward remittance works:
1. Initiating the Transfer
The process begins when the sender initiates a transfer from their bank or a correspondent bank in a foreign country to an Indian bank. The following details are required to complete the transaction:
- Recipient’s account number
- Customer ID
- SWIFT code
- Purpose of remittance
Typically, inward remittance transaction take 24-48 banking hours to be processed and completed.
2. Bank Processing
Once the transfer is initiated, the sender’s bank processes the transaction and converts the funds into Indian Rupees (INR) based on the prevailing exchange rate. If the transfer is made through a correspondent bank associated with an Indian bank (e.g., HDFC Bank), the money is transferred accordingly. The bank applies relevant charges and processes the currency conversion as per the current exchange rate.
3. Receiving Bank and Final Credit
Once the funds reach the Indian bank, they are credited to the beneficiary’s account after applicable deductions. The beneficiary receives a notification from their bank confirming the successful transfer. It is important to note that Tax Collected at Source (TCS) deductions may apply as per RBI guidelines.
Understanding how inward remittance works ensures smoother and faster transactions while complying with regulatory requirements. Always check with your bank for specific remittance charges and TCS implications before initiating a transfer.
Also Read: Confused between bank transfer and remittance? Check this blog and understand the differences between Bank Transfer and Bank Remittance
How Outward Remittance Works?
Foreign outward remittance involves sending money from India to a foreign country. This might be necessary for paying tuition fees, accommodation, or other expenses. Here’s a step-by-step guide on how outward remittance works:
1. Application Process
The sender visits their bank in India and fills out an outward remittance application form. They must provide details such as the purpose of the transfer, beneficiary information, and foreign bank account details (or those of the correspondent bank abroad).
2. KYC Compliance
As per Reserve Bank of India (RBI) regulations, the sender must submit Know Your Customer (KYC) documents. This may include a passport, visa, and university admission letter (if applicable).
3. Bank Approval
Once all required documents are submitted, the bank verifies them before processing the outward remittance transaction. Upon approval, the remittance is initiated.
4. Currency Conversion & Transfer
The bank converts Indian Rupees (INR) into the required foreign currency at the applicable exchange rate. Taxes or charges may be deducted as per RBI guidelines. Once the transaction is completed, the sender receives confirmation from the bank.
By understanding how outward remittance works, individuals can ensure a smooth and hassle-free international money transfer.
Note: All the inward and outward remittances are closely monitored by the monetary authority of the country i.e. Reserve Bank of India. Please refer to LRS (Liberalised Remittance Scheme) guidelines issued by RBI and check the limits, taxes and other applicable rules.
Economic Impact of Foreign Remittance
1. Boosting Household Income
Remittances provide essential financial support to families, helping them cover expenses such as education, healthcare, and daily necessities.
2. Supporting National Economies
Developing nations rely on foreign remittances to strengthen their economies. In some countries, remittances account for over 20% of their GDP.
3. Enhancing Financial Inclusion
As more people receive remittances through digital banking and mobile wallets, financial inclusion improves, leading to better economic opportunities.
Challenges in Foreign Remittance Transfers
Despite its benefits, foreign remittance transactions face several challenges:
- High Transfer Fees: Some providers charge high fees, reducing the amount received by the recipient.
- Exchange Rate Fluctuations: Currency conversion rates can impact the value of remittances.
- Regulatory Restrictions: Governments impose regulations to prevent money laundering and fraud, sometimes delaying transactions.
- Limited Access in Rural Areas: Many rural communities lack banking infrastructure, making it difficult to access remittance services.
FAQs on How Foreign Remittance Works
The process of how foreign remittance works includes:
– Choosing a transfer method (bank transfer, online service, or money transfer operator).
– Providing recipient details and purpose of transfer.
– Completing KYC verification.
– Bank approval and currency conversion.
– Transfer completion and recipient receiving funds.
Banks and money transfer services provide a tracking number or reference ID, allowing senders to monitor the status of their transaction online or via mobile apps.
Money sent by an individual from abroad or a foreign country to family, friends or relatives staying in their home country to manage expenses is known as foreign remittance.
Sending money abroad is very easy these days. International Wire Transfer is one of the best ways to send money abroad or to receive money from a foreign country.
Foreign outward remittance is the process of sending money to an individual from India to a foreign country to pay tuition fees, accommodation, or other expenses.
Bank transfers: 24-48 banking hours.
Online money transfers: Instant or within a few hours.
Wire transfers: 1-3 business days, depending on the destination country.
As per the revised LRS scheme, no TCS will be applicable for remittances if it is for medical and educational purposes. However, a 20% TCS will be applicable on remittances for all other purposes. Also, a TCS of 5% will be applicable for amounts exceeding INR 7 lakh for education and medical treatment abroad.
Inward remittance is the process of sending money from a foreign country to India. The money sent to the family, friends or relatives to support them financially is usually considered a remittance.
When a certain amount of money is transferred from one account to another, it is known as a bank transfer. However, bank remittance means when a transfer is made between two different accounts.
The cost depends on the transfer method and service provider, including:
Transfer fees.
Exchange rate margins.
Bank processing charges.
Tax Collected at Source (TCS) as per RBI regulations.
Understanding foreign remittances is important for Indian students studying abroad. Whether receiving financial support from home or covering educational expenses, being well-versed in the inward and outward remittance processes ensures a smooth financial journey. By following these simple steps and staying informed about exchange rates and regulations, students can focus on their studies without the stress of managing international finances.
To know more about the remittance process, loan application process, the best international bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
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