By Shlok Srivastav
The Indian diaspora is the largest in the world, so it’s not surprising that in 2022, India
In the April-December period of the fiscal year 2023–24, outward remittances facilitated by the Reserve Bank of India
International travel, equity and debt investments, as well as support for close relatives, were among the primary drivers behind the outflows. Recent data from the RBI indicates that remittances under LRS amounted to $24.80 billion during the nine-month period ending in December 2023, compared to $20.63 billion during the corresponding period in the previous year. Year-on-year, outward remittances in the third quarter of FY24 increased by 7.89% to $6,457.72 million compared to Q3 FY23.
The Liberalised Remittance Scheme (LRS) permits each Indian citizen to transfer up to $250,000 abroad per annum. Indians send money
Investing in foreign markets provides three key benefits: geographical diversification, risk reduction, and a greater variety of investment opportunities.
However, despite several amendments to the LRS over the years, there remain several issues that can complicate outward remittances, particularly for investment purposes.
How remittances can pinch
Historically, remittance was a cumbersome and costly process. You would need to visit a branch of your bank, fill out a form (Form A2), attach proof of the purpose of remittance if required, and then wait for a couple of days for the bank to process your application.
As you might expect, this process has mostly been digitalized now: you can fill out the form and submit the requisite documents online. Nevertheless, most banks typically charge a basic fee of between Rs 500-2,000 to process each remittance, depending on the remittance amount.
In addition, you will usually be charged a forex markup fee as well, which will typically range between 1 to 1.5%. You might also have to pay some transaction charges levied by the foreign bank receiving your money. Lastly, there is also a SWIFT cost per remittance that can be as high as $20 per transfer.
Another pain point when it comes to remitting sums abroad for investment purposes is that from 1 October 2023 onwards, 20% (as opposed to the current 5%) of the remittance amount exceeding Rs 7 lakh will be deducted as Tax Collected at Source (TCS). The deducted amount can be adjusted later against your actual tax liability, with the amount being fully refunded to you (with interest) if you don’t owe any taxes. Nevertheless, this can result in a sizable sum being locked away for several months, resulting in a large opportunity cost.
Solutions
As far as the 20% TCS is concerned, there is no way to escape it if you’re an individual looking to invest abroad. What you can do, however, is use the TCS certificate to set off as advance tax payable. There are two major drawbacks of such an approach, however. The first is that you won’t be able to craft your foreign portfolio exactly the way you wanted to. The more important problem is that Indian mutual funds have a collective cap on the sum they can invest abroad, and if that cap is breached, they stop accepting fresh investments into foreign-oriented funds.
With digitalization mostly being a solved problem, the key issue that still persists is the cost of remittance: the fixed bank fee, forex markup, receiving bank charges, and SWIFT charges can all add up to be a significant amount.
However, there are fintech companies that have mitigated this issue as well by offering zero remittance charges and the best-negotiated forex rates, thus making remittances much more cost-effective. As a result, Indians can now remit as little as Rs1 and invest in global stocks like Google, Amazon
With such technologies in the hands of Indians, the future looks bright for the country’s investing landscape, and market
(Author is Co-founder & COO, Appreciate)