Currency Spread

A bank or a financial institution charges a spread between the buying and selling price of a foreign currency. For example, if the US dollar trades against the Indian rupee at 75, a bank will sell the dollar to you at 78 and buy the dollar at 72. These spreads can be a hefty 4-5% on what is known as the ‘card rate’ or ‘rack rate’ of the bank. The highest spreads are typically levied by forex agents at airports but spreads are also levied on wire transfers for things like investing in international stocks, transfers for education, gifts or maintenance.

Bank commission

Over and above the spread, a bank will charge a commission. On this commission, a GST of 18% is charged (9% CGST and 9% SGST). Thus, if you are transferring ₹10 lakh to the USA, the bank might charge a commission of ₹500. On top of this, you have to pay GST of 18% which comes to ₹90.

GST on currency conversion

Goods and services tax (GST) becomes payable on currency conversion over and above the GST levied on bank commission. The GST amount is levied on what is called the ‘taxable value’ of the transfer. This taxable value is 1% for transfers up to ₹1 lakh, 0.5% plus ₹1,000 on transfers from ₹1 lakh to ₹10 lakh and 0.1% plus ₹5,500 on transfers above ₹10 lakh, capped at ₹60,000. For example, if you are transferring ₹25 lakh, the taxable value will be ₹5,500+0.1% of ( ₹25 lakh- ₹10 lakh). This comes to ₹7,000. The GST is then levied at 18% on ₹7,000 which comes to ₹1,260. So, let’s assume that the bank charged a commission of ₹500 (with GST of 18%) and spread of ₹1 lakh. Adding up the commission, spread and GST, you will end up paying ₹1,01,850 as charges in your transaction of ₹25 lakh. Spread is usually the biggest part of these costs and can be reduced as shown below.

Tax collected at source

Indian residents are allowed to transfer up to $250,000 per year for purposes such as investment in foreign stocks or funds, education, maintenance of relatives and tourism. However, the bank or forex dealer will deduct TCS (tax collected at source) at 5% on transfers of more than ₹7 lakh per annum. This TCS can be set off against other taxes you owe but it becomes an upfront cost to you.

In the case of GST and TCS, there is nothing you can do to reduce them. However, you can work on charges such as currency spread.

Sitashwa Srivastava, founder of Stockal, an international investing platform for Indians, suggests a few methods of reducing your transaction costs.

“First, if you are sending money online, do it in banking hours. Banks tend to have higher spreads outside those hours. Second, call up your relationship manager. You can negotiate a better deal than the prevailing card rate with the concerned bank,” he said. Without negotiation, the bank will convert your money as per its standard ‘card rate’, which will usually have high spreads. Srivastava also added that you can shop around for providers. “Smaller banks such RBL or IDFC First or third party transfer agencies like Western Union and Xoom (a Paypal Service) might offer you more competitive rates,” he said. Last but not least, according to Srivastava, if you are transferring money for investment in global stocks or bonds, going through a platform might help.

“Platforms like ours have tie-ups with banks, which give preferential rates to our customers,” he added.

Viram Shah, chief executive officer of Vested, another international investing platform added that you can only go through non-bank third-party agents for transfers on account of education and travel, among others. These are considered as current account transactions.“If you are investing in international stocks or bonds, you have to go through a bank in India. While withdrawing money also, it has to come to your bank in India,” he added.

“The commission and spread change drastically according to the size of the remittance,” said Vikas Gupta of Omniscience Capital. “Higher amounts face lower charges and these can be brought down through negotiations with the banker. As a rule of thumb, don’t go for international investing through the liberalized remittance scheme (LRS) if you have less than $5,000 to invest,” he added.

You can bargain down a bank’s foreign exchange spread and avoid small foreign exchange transfers to keep costs low. Ensure that you factor in the various costs and taxes involved before you make a forex transfer.