Taxation & Compliance
Posted on Jan 31, 2025
A Simplified Guide to Tax on Currency Exchange in India: GST, TCS, and Forex Tax Explained
Understanding Tax on Currency Exchange in India
You may have noticed some additional charges above the exchange rate while sending money abroad, receiving international payments, or exchanging foreign currency. This is because Indian currency exchange transactions attract various levies, including GST on foreign exchange, TCS (Tax Collected at Source), and income tax.
It does not matter if you are freelancing and taking international payments, importing and exporting, or only exchanging money while traveling. What you need to know about India's currency exchange tax is summed up in the following guide of what they are, how they are calculated, and how one can minimise these costs.
What is Tax on Currency Exchange?
Tax on Currency Exchange in India refers to the various taxes that the government of India levies on forex transactions are GST, TCS, and income tax. These taxes apply to money transfer, currency conversion, and profit from forex trading.
Why Tax is Levied on Currency Exchange?
The Indian government levies these taxes for several reasons:
To raise revenue from foreign exchange transactions.
To control forex trading and international money transfers.
To monitor large foreign transactions, adhering to the tax laws.
By reading this forex tax explanation, one can understand better how to handle currency exchange cost for himself and his enterprise.
Types of Currencies Exchange Tax in India
1. GST on Foreign Exchange Advance or Performed
GST is applicable only on currency conversion services, not on foreign remittances. If you receive payments in foreign currency and convert them to INR, GST applies based on transaction slabs, ranging from 1% (minimum ₹250) to a maximum of ₹10,800. The rate of GST is determined based on the value of the transaction:
₹1,00,000 and less → 1% of the amount or ₹250 (whichever is higher).
₹1,00,001 to ₹10,00,000 → ₹1,000 + 0.5% of the amount exceeding ₹1,00,000.
Above ₹10,00,000 → ₹5,500 + 0.1% of the amount exceeding ₹10,00,000 (capped at ₹60,000).
2. Tax Collected at Source (TCS) on Forex Transactions
Under the Liberalized Remittance Scheme (LRS), TCS applies to remittances exceeding ₹7,00,000 in a financial year.
A 5% TCS is levied on amounts beyond this threshold.
3. Income Tax on Forex Gains
Where you trade forex, forex gains may attract income tax as either capital gains or business income, depending on the nature of the trading business.
GST for Foreign Exchange: All You Wanted to Know
How is GST Computed for Currency Conversion?
GST on foreign exchange is computed on the transaction value, based on a slab structure. The more the transaction value the lesser the percentage-based tax applied.
Who Needs to Pay GST on Foreign Exchange?
GST applies only to currency conversion services, not to remittances or service exports. Freelancers receiving foreign payments are exempt under zero-rated supply provisions.
Some Common Examples of GST
Remitting funds overseas (tuition fees, investment, etc.)
Receiving payments from overseas ( freelancing, overseas business deals).
Buying forex to send abroad
Understand GST on currency exchange to manage your forex transactions accordingly.
How Taxes on Currency Exchange Affect the Different Stakeholders?
Freelancers and Sole Traders
If you're a freelancer or service provider exporting services abroad, your earnings are treated as a zero-rated supply under GST. This means you don’t have to charge or pay GST on your income from foreign clients. However, you may need an FIRC (Foreign Inward Remittance Certificate) for compliance purposes.
Businesses Engaged in Import and Export
Companies dealing with international suppliers or customers must comply with TCS, GST, and income tax regulations. Understanding these taxes helps businesses optimize costs and remain compliant.
Forex Traders and Investors
It is taxable as capital gain and business income according to the frequency of trading. Losses can be set off against other income subject to certain conditions.
For the freelancers and forex traders, knowing freelancer tax in India and forex trading tax in India is fundamental in the proper adherence to tax on international transactions
How to Minimise Currency Exchange Taxes Cost?
1. Digital Payments and Online Platforms
Many online forex platforms offer competitive exchange rates and lower transaction fees, which reduce overall tax costs.
2. Track Exchange Rates and Plan Transfers Strategically
Exchanging currency when rates are favorable helps reduce the total tax burden.
3. Consult a Tax Expert
A professional can help reduce forex tax by optimizing tax deductions and ensuring compliance with forex-related tax laws.
While GST on forex conversion is fixed, choosing platforms with lower forex conversion fees can help reduce overall transaction costs.
Conclusion
Taxes on currency exchange can be quite impactful for an individual and businesses. Whether it is a traveler, freelancer, forex trader, or a business owner, it will help one save money and be compliant knowing how GST, TCS, and income tax apply to Forex transactions.
Infinity's Currency Converter allows one to calculate a cost immediately as a result of easy and transparent forex transactions without breaking any regulation regarding forex tax India. Become compliant with forex tax India; make smart, intelligent financial choices!
FAQs
1. What is GST on currency exchange in India?
In India, the applicable GST on forex transactions is slab-based, that is, Rs 0.1 to 1 per cent based on the amount.
2. How is tax calculated on forex transactions?
Taxes constitute GST on forex services, TCS if remittances exceed ₹7,00,000, and income tax on profit earned on forex trading.
3. What is TCS, and how does it work with respect to foreign exchange?
TCS is a 5% tax collected on foreign remittances above the threshold of ₹7,00,000 per year.
4. Can I claim a refund on the GST paid for currency exchange?
For business forex transactions, you may be eligible for a GST refund under certain conditions.
If you want to find answers to the GST FAQs regarding forex or seek clarification on the tax on foreign exchange FAQs, this guide is here to assist you.
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