Complete guide on foreign inward remittance: Everything you need to know

Receiving international payments can be tricky. Whether you're a business owner, freelancer, or just someone receiving funds from abroad, understanding inward remittances is crucial. The process often feels overwhelming so here's a guide covering everything you need to know about inward remittances in depth.

The word remittance means transferring money from one account to another. These transactions typically take place between accounts set up in different countries. Simply put, inward remittance means money that is sent from a foreign country into your local bank account.

From India’s perspective, inward remittance would mean funds being transferred from a foreign bank account to an account holder in India. The process begins when a sender initiates the transactions from the bank or through a digital remittance platform. These funds are routed through other banks and are deposited into the recipient's account. 

Say Raj is a freelance interior designer based in Mumbai. He has regularly been working with clients based in Italy and France. He raised an invoice of EUR 5000 at the end of one such project. The client based in France initiated a wire transfer from his bank account, which is routed to India. This payment could be routed through different banks in different countries before it reaches Ranjit’s indian bank account. Once the amount is received, the transaction is classified as an inward remittance. Ranjit will also receive the Foreign Remittance Certificate (FIRC) for compliance purposes.

These transactions can be made by anyone provided the initiator and recipient have bank accounts and the funds are remitted through authorized channels or licensed service providers.

Now, let’s understand each step in the remittance journey to ensure that the process is smooth, secure, and fully compliant with regulatory guidelines.

• Initiation: The process begins when a sender from a foreign country entity initiates a transaction.
• Processing: The funds are transferred through one or more intermediary banks. The sender must provide relevant beneficiary details. If the sender bank does not have a direct tie-up with the Indian bank, the transactions are routed through a correspondent bank. The intermediary bank facilitates currency exchange and uses the SWIFT system to complete the transfer. Once the funds reach the recipient bank, they are converted to INR using the prevailing exchange rate, and nominal charges may be levied by the remittance platform or service provider.
• Credit: After verification, the Indian bank credits the amount to the recipient bank account and sends a notification.
• Notification: An FIRC or an advice copy is used as proof for documentation and taxation purposes. 

Inward remittance is more than just a money transfer; it serves as a lifeline to millions of households and businesses; it plays a very crucial role in the Indian economy, contributing to foreign exchange reserves and supporting livelihoods nationwide. 

• Business Transactions: Payments for exports, services rendered, business investments, professionals etc are covered under inward remittances. 
• Education and Tuition Fees: Financial support lent to a student studying in India by family members living in another country, whether in the form of fees or general upkeep, will be covered under inward remittance. 
• Medical Expenses: If family members are sending funds for any medical expenses, treatments, surgeries or maintenance, they are covered under inward remittances. These remittances are typically prioritized by banks and service providers to ensure timely care.
• Donations and Religious Contributions: Any donations or religious contributions towards one or more charitable trusts or organizations are covered under inward remittances. 
• Gifts: Ananya, who got married recently, received USD 3000 from her grandfather, who lives in the US. This transfer is an inward remittance.

Based on the nature and value of inward remittance, the RBI and FEMA mandate certain documents to be submitted. Below is a comprehensive list of documents, but not every inward remittance will need all these documents:

• Government-Issued Identity Proof 
• Bank Account Details
• Self-declaration if sent for personal use  
• Invoice issued, and the relevant purpose code (if it is for professional reasons)
• Receipt proof for tax filing, GST.
• Student Admission Letter and Student ID proof (if for educational purposes)
• Tax Residency Certificate if withholding tax is applied
• FORM 15CB & 15CA for certain high-value transactions

Choose a method that aligns with the amount, purpose, urgency, and compliance, which makes the recipient a secure and friendly decision for receiving funds. The key methods of receiving funds from abroad are

While the above are potential methods of receiving payment, when choosing a platform, you must keep the following in mind:

• Authorized channels: Choose only licensed remittance providers, SWIFT-enabled banks, or licensed fintech platforms like Xflow to carry out the transaction.
• Thoroughly verify sender and receiver details like the code and the purpose of remittance.
• Tax Implications: While personal remittances are not taxable, business and professional income are subject to tax.
• Maintain copies: Maintain copies of transfer confirmation, FIRC, invoices, and email correspondences with the sender of the remittance.

Inward remittance compliance may seem technical at first, but understanding these rules ensures smooth and secure fund transfer. 

The Foreign Exchange Management Act (FEMA, 1999) was enacted to manage the foreign exchange transactions in India. Under FEMA regulations, all inward remittances should be processed through scheduled commercial banks with RBI approval. 

The RBI and FEMA set forth specific guidelines, one of which mandates that every inward remittance must be accompanied by a valid purpose code that identifies the nature of the transaction—whether it is for services, gifts, education, or business purposes. Under the Rupee Drawing Arrangement (RDA), there is generally no upper limit for inward remittances made for personal purposes. For trade-related transactions, however, there is an upper cap of ₹15,00,000 per transaction. 

When it comes to cash transfers through the Money Transfer Service Scheme (MTSS)—such as via Western Union—the RBI limits each transaction to USD 2,500 and allows a maximum of 30 transactions per beneficiary per calendar year.

There are various fintechs doing a great job in helping users streamline this entire process and be aligned with the regulations. Xflow is one such platform.

Inward remittances are typically not liable for taxation purely based on the fact that they are received from another country. The tax liability depends on the reason for the transfer and the tax residency status of the receiver.

When inward remittance is not taxable

Non-repayable personal transfers from overseas family members (like donations for a student's education, living expenses, or even a gift) are mostly non-taxable.

Income paid to NRIs is also non-taxable in India unless sourced from Indian sources.

Additionally, remittances towards investments or business contributions are non-taxed when received, but the revenue generated from those funds (interest, dividends, or profits) may be taxable at a later date.

When inward remittance can be taxable

If the inward remittance is in payment for rendering of any services, whether freelance or consulting services, by a resident Indian, then such income is deemed taxable under the law of India.

Further, non-relatives gifting above ₹50,000 in a given financial year may be deemed as taxable under income from other sources.

TDS (Tax Deducted at Source) and Related Documentation

As a rule, there is no TDS on remittances received from foreign countries.

However, remittance certificates (FIRC) issued by foreign banks for inward remittances to India stand as authoritative proof.

While selecting the right remittance partner, here are 5 things you should consider:

• Low fees and competitive exchange rates
• Short processing time 
• Faster and more predictable settlement windows
• 24/7 customer support
• End-to-end regulatory compliance

There are two types of remittances, inward and outward. Here is a comparison table that will give you an overview of the differences. Click here to understand the differences in depth.

Choosing a partner who understands your needs can make a significant impact on your bottom line and user experience. We can be that partner for you. Our platform is designed to make receiving international payments smooth, compliant, and efficient for Indian businesses, freelancers, and startups. Here's how our platform simplifies inward remittances:

• Fast onboarding = faster transactions
• Real-time forex rates, which enable fair currency conversions at all times
• End-to-end compliance with regulatory requirements
• Quicker access to funds by bringing the processing time down to half
• Automated FIRC generation to streamline tax compliance
• User-friendly dashboard

With Xflow, you are left to focus on growing and expanding your business instead of remaining worried about your cash flow.