Sending a reimbursement residence for Indians and different expatriates working within the US will presumably get just a little dearer after American lawmakers within the Senate on Tuesday and the Home of Representatives on Thursday narrowly handed President Donald Trump’s ‘large, stunning’ spending invoice containing a proposal to impose a brand new 1 per cent tax on remittances.
The 1 per cent tax on remittances within the One Huge Stunning Invoice Act (OBBBA) will come into impact from January 1, 2026. Initially proposed as a 5 per cent tax on non-commercial cash transfers despatched abroad, the speed was reduce to three.5 per cent and eventually to 1 per cent.
Crucially, the model handed by the Senate made some vital exclusions which might soothe the ache. For one, the tax solely applies to remittances despatched utilizing money, cash orders, cashier’s checks, or the place the sender offers “some other comparable bodily instrument” to service suppliers. This implies, the tax – which can solely apply to transfers of greater than $15 – won’t be levied on transfers made by means of financial institution accounts or US-issued debit and bank cards. The tax can even not apply if the sender can show US citizenship.
In response to Gaura Sen Gupta, Chief Economist at IDFC FIRST Financial institution, the affect of the tax on cash despatched to India is prone to be distributional in in 2025-26, with remittances “frontloaded and extra concentrated” within the first three quarters of the fiscal provided that the tax will solely come into impact in January 2026. “However the truth that it’s a a lot decrease price than what was proposed earlier means the affect needs to be restricted,” Sen Gupta added.
In the meantime, US-based non-profit Heart for International Improvement estimates India stands to lose barely lower than $500 million in formal remittances as a result of US imposing the tax, solely second to Mexico, which faces successful of greater than $1.5 billion.
India’s report remittances
A tax on remittances generally is a large headache for India given that it’s the prime recipient nation. In response to the newest information launched by the Reserve Financial institution of India (RBI) final week, private transfers from overseas in 2024-25 have been up 16 per cent from the earlier yr at $124.31 billion on a web foundation. In gross phrases, they have been up 14 per cent at $132.07 billion.
After all, not all of India’s remittances come from the US. Nevertheless, the world’s largest financial system is the most important supply, accounting for 27.7 per cent of remittances India obtained in 2023-24, as per the RBI’s newest remittances survey. Provided that the gross private transfers in 2023-24 stood at $115.55 billion, India bought roughly $32 billion from the US that yr.
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What’s price noting right here isn’t a lot the quantity of remittances from the US however the truth that a bigger and bigger share of the cash India will get from overseas is coming from the US. Again in 2016-17, the US’ share of remittances into India was 22.9 per cent.
The significance of remittances India receives can’t be overstated: in 2024-25, not solely did web remittances absolutely cowl the nation’s items and companies commerce deficit of $98.39 billion, however there was one other $26 billion or so left after doing so.
Costlier transfers
Even when remittances into India from the US don’t decline by a lot, the tax represents a brand new hurdle for cross-border funds. However simply how pricey is it to ship cash into India?
In response to the World Financial institution, the typical price of sending $200 to India in October-December 2024 was 5.3 per cent in comparison with the worldwide common of 6.6 per cent. The price of making worldwide funds rises relying on the variety of intermediaries, or correspondent banks, concerned, with charges being charged and operational delays attainable at each stage. These prices and delays have been a key driver of central banks exploring the usage of their digital currencies to make cross-border transfers.
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One other route to chop down on time and value inefficiencies in present cross-border funds has been the linking of nationwide immediate fee methods, one thing which India has already began doing by connecting its Unified Funds Interface with Singapore’s PayNow. Challenge Nexus of the Financial institution for Worldwide Settlements, a world organisation of central banks, takes issues to a different degree by specializing in “cheaper, sooner, extra clear and accessible” cross-border funds. The RBI joined Challenge Nexus final yr.