How to Avoid the Remittance Tax?

When Trump came to power, many believed it would bring good news for India. Given the close friendship between Modi and Trump, people hoped he would be favorable toward India. In fact, the stock markets showed a slight uptick immediately after Trump’s victory. But...

Trump took an unexpected turn against India. Almost every decision he has made seems to impact India — and not in a minor way. The effects have been heavy and disruptive. We’ve already seen the chaos caused by his stance on deportations, which left international students in panic. After that, he launched into trade wars and tax disputes.

In a conversation with Apple CEO Tim Cook, Trump even bluntly remarked that India should take care of itself and that Apple doesn’t need to invest there to "rescue" it. If we go down the list, there’s hardly a single decision made by Trump that clearly favored India. And now, he’s thrown another bolt at Indians — the Remittance Tax.

The U.S. has proposed a 5% tax on every international money transfer made by non-U.S. citizens. For example, if someone in the U.S. wants to send money to their family in India, they would have to pay a 5% tax on the amount. This policy will affect all foreign nationals living in the U.S., but Indians, who make up a significant portion of remitters, will be hit the hardest.

In the 2023–24 financial year, India received around $32 billion in remittances from the U.S. If this tax is implemented, it would cost Indians around $1.6 billion just in taxes. Essentially, anyone sending money from the U.S. to India would be affected.

So, how can one avoid or minimize this tax?

If the bill gets passed, there’s no way to completely avoid the tax. However, there are some short-term strategies to reduce the impact before the law is enforced:

1. Send large transfers now: If you're planning to send money, do it before the tax becomes law. It may help you avoid the new charge.

2. Convert remittances into investments: Instead of wiring money directly to family, consider investing in India (property, business, etc.). These may not be treated as remittances.

3. Utilize gift exemptions: If your transfer falls under gift tax exemption limits, consider sending it as a gift.

4. Use other business channels: If you operate businesses in other countries, you may be able to pay or transfer funds from those accounts to India, avoiding U.S.-sourced remittance classification.

5. Watch for bank exemptions: If the tax is implemented, some U.S. banks may offer partial relief or benefits. Opening accounts in such banks may help reduce the burden.

On the Indian side, the government may also take action to prevent double taxation and ease the pressure on foreign exchange inflows. Since remittances are vital for India's economy, the government is likely to explore relief options.

At the moment, there's no complete clarity on how and when this remittance tax will be enforced. Legal challenges are expected. Eventually, exemptions could be provided for certain visa holders.

Until there’s a clear policy, it's wise to send money sooner rather than later and reduce remittance amounts gradually once the law is in place.