How to calculate the cost of foreign remittances

Understanding the Real Cost of Sending Money Abroad

Many people think the exchange rate they see on Google is the rate they will get when they send money overseas. This is a common and costly mistake. The number you see online is just a starting point. The true cost of your transfer is buried in markups, fees, and taxes. Understanding these costs is vital, especially when you consider the FEMA rules for Indian investors and the Liberalised Remittance Scheme (LRS).

The problem is that hidden charges can eat away a significant portion of your money. A few rupees here and there add up, especially on large transfers for investments, education, or family support. The solution is to learn how to break down the total cost into its individual parts. This article shows you how to do just that in five clear steps.

Step 1: Find the Mid-Market Exchange Rate

Before you do anything else, you need a baseline. This baseline is the mid-market rate, also known as the interbank rate. This is the 'real' exchange rate that banks and large financial institutions use to trade currencies with each other. It’s the midpoint between the buy and sell prices of a currency on the global market.

You can easily find the current mid-market rate by searching on Google (for example, "USD to INR") or on financial news websites like Reuters. This rate changes constantly. Remember, this is not the rate you will be offered. It is your benchmark to measure how much extra you are being charged.

Step 2: Uncover the Exchange Rate Markup

Here is where the biggest hidden cost usually lies. Your bank or money transfer service will not offer you the mid-market rate. Instead, they offer you their own rate, which includes a markup or a spread. This is their profit.

The markup is the difference between the mid-market rate and the rate they give you. For example:

• Mid-Market Rate: 1 US dollar = 83.00 rupees
• Bank's Offered Rate: 1 US dollar = 84.20 rupees

The markup is 1.20 rupees per dollar. It sounds small, but if you are sending 5,000 dollars, this hidden fee costs you 6,000 rupees (5,000 x 1.20). Always ask for the exact exchange rate you will get and compare it to the mid-market rate to see the markup.

Step 3: Identify the Fixed Transfer Fees

Next are the upfront fees. These are easier to spot because they are usually stated clearly. These charges are often called a wire transfer fee, a service fee, or a remittance charge. It's a fixed amount that you pay for the service, regardless of how much money you send.

For example, a bank might charge a flat fee of 1,000 rupees plus GST for every international transfer. This fixed fee makes sending small amounts of money very expensive. A 1,000 rupee fee on a 10,000 rupee transfer is a 10% cost. But on a 200,000 rupee transfer, it's only a 0.5% cost. Always check the fixed fees before you commit.

Step 4: Don't Forget Receiving Bank Charges

This is a cost that surprises many people. After you’ve paid fees on your end, the recipient’s bank abroad might also charge a fee to receive the money. This is sometimes called a correspondent bank fee or an intermediary bank fee.

These fees can range from 15 to 50 dollars, or the equivalent in the local currency. This amount is deducted from the money you sent, so your recipient gets less than you intended. Some modern transfer services allow you to pay all fees upfront to ensure the recipient gets the exact amount, but many traditional banks do not offer this.

Step 5: Calculate Tax Collected at Source (TCS) Under Indian FEMA Rules

If you are a resident of India, you must account for Tax Collected at Source (TCS). This is a key part of the FEMA rules for Indian investors and anyone sending money abroad under the Liberalised Remittance Scheme (LRS). The LRS allows you to send up to 250,000 US dollars overseas per financial year.

For most remittances like investments, property purchase, or sending money to family, a TCS of 20% applies to any amount over a threshold of 700,000 rupees in a financial year. For education-related expenses paid through a loan, the rate is much lower at 0.5% over the same threshold.

It is crucial to understand that TCS is not a separate tax. It is an advance tax collected on behalf of the government. You can claim this amount back as a credit against your total income tax liability or receive it as a refund when you file your income tax returns. However, it does affect your immediate cash flow.

For more detailed information on LRS, you can refer to the official RBI website.

A Real-World Calculation

Let's see how this all adds up. Imagine you want to send 5,000 US dollars to your child studying in the United States. Assume you have not sent any money abroad this financial year.

As you can see, the total direct and indirect cost to send 419,500 rupees is over 7,300 rupees. That's an effective cost of about 1.75%.

Common Mistakes to Avoid

People often lose money by making simple mistakes. Be sure to avoid these:

• Focusing only on the fee: A low transfer fee can hide a very high exchange rate markup.
• Using your main bank by default: Banks often have higher markups than specialized remittance companies. Always compare.
• Forgetting about the recipient's costs: Not accounting for receiving bank fees means your loved one gets less than planned.
• Ignoring TCS: Forgetting about the 20% TCS on amounts over 700,000 rupees can cause a major cash flow problem, even if it's refundable later.