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US Proposes 5% Remittance Tax on Non-Citizens: What Indian NRIs Need to Know

  • Writer: tax comply
    tax comply
  • May 19
  • 4 min read
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Introduction: A New Tax Proposal That’s Raising Global Alarm


In May 2025, the US House Budget Committee cleared the “One Big Beautiful Bill” — a sweeping legislative package under former President Donald Trump’s administration. Framed as a combination of tax incentives, spending cuts, and enhanced border enforcement, the bill has triggered significant concern among immigrant communities, particularly the Indian diaspora, due to one specific provision: a 5% federal excise tax on personal remittances sent abroad by non-citizens.

This provision — affecting H-1B and L1 visa holders, international students, and even green card holders — has sparked debate over its legality, fairness, and potential economic consequences. While the bill still awaits passage in the House of Representatives and Senate, its ripple effects are already being felt.


What Is the 5% Remittance Tax?

  • Who Will Be Affected?

    The tax targets all non-US citizens — including temporary visa holders (H-1B, L1, F-1), lawful permanent residents (green card holders), and other resident aliens. Only those who can prove US citizenship or national status are exempt.

  • How Will It Be Collected?

    This is a federal excise tax, not an income tax. It will be withheld at the point of remittance by banks, money transfer providers, or other financial intermediaries, which must then remit it to the US Treasury on a quarterly basis.

  • No Minimum Threshold -

    The tax applies regardless of the amount transferred, meaning even small remittances will be taxed at 5%.

  • What Triggers the Tax?

    The tax is levied simply by virtue of transferring funds abroad — it is agnostic to the source, purpose, or frequency of remittances.


Why Indian NRIs Are Especially Concerned

1. Scale of Impact

The United States is the largest source of remittances to India, accounting for approximately $32 billion, or 28% of India’s total remittances in FY 2023–24. If the proposed tax is enacted:

  • Indian remitters may collectively pay $1.6 billion annually in additional taxes.

  • States like Kerala, Uttar Pradesh, and Bihar, which are heavily dependent on remittance income, will face increased economic pressure.

2. Household Financial Burden

A 5% tax on every $1,000 means either:

  • The recipient gets only $950, or

  • The sender must remit $1,052.63 to ensure the family receives the intended $1,000.

This extra burden could discourage frequent transfers or reduce the net support families receive — affecting essential expenses like education, housing, and healthcare.

3. Macroeconomic Risk for India

  • A 10–15% drop in remittances could lead to a $12–18 billion shortfall.

  • This would weaken the Indian rupee, potentially forcing the Reserve Bank of India to intervene more frequently in the forex market.

  • Investment sentiment may also suffer, particularly in NRI-focused real estate and fintech sectors.


Cross-Border Tax Complexities: US vs. Indian Regime


A. Not Income Tax, So Not Always Credit-Eligible

  • The US tax is a federal excise, not tied to income.

  • Though the bill allows a conditional credit against US federal income tax (subject to Social Security Number) and filing compliance), many NRIs and transitioning residents may not qualify.


B. Comparison with Indian TCS on Remittances

India’s Tax Collected at Source (TCS) under the Liberalized Remittance Scheme (LRS):

  • Applies only above specific thresholds.

  • Is a prepaid income tax, fully creditable when filing Indian returns.

  • Is governed by Section 206C of the Income-tax Act, 1961, not a punitive levy.

The US 5% tax, in contrast, is not linked to income — making its eligibility for foreign tax credit (FTC) under Indian law ambiguous.


C. Rule 128 and the Foreign Tax Credit Dilemma

Rule 128 of India’s Income-tax Rules allows FTC only for taxes on income, not excise or transaction-based levies.

Unless clarified by the Central Board of Direct Taxes (CBDT):

  • Remittances taxed in the US may not qualify for FTC in India.

  • This could inflate the overall tax burden for Indian beneficiaries with US tax connections.


FEMA, NRE Accounts, and Compliance in India

Under FEMA, Indian NRIs can freely remit funds to India through NRE or FCNR accounts, and such inbound remittances are tax-free in India.

However, the US tax would apply before the money exits the US — meaning Indian recipients will receive a reduced net amount, and any Indian tax planning won’t mitigate the original deduction.


What Indian NRIs and Families Should Do Now

  1. Consider Advance Remittances: Send larger amounts before the law potentially comes into force.

  2. Maintain Robust Documentation: Keep detailed records of all remittances, sender status, and purposes — for compliance in both jurisdictions.

  3. Stay Updated: The bill is not yet law. Monitor updates from both US and Indian authorities closely.


Conclusion: A Tax That Signals a Shift in Policy Mindset

This proposed 5% excise on outbound remittances is not just another tax — it represents a strategic shift in how governments regulate financial mobility. For Indian NRIs and their families, the stakes are high — financially, legally, and emotionally.

Even if the bill does not pass in its current form, it reflects an emerging policy posture: one that demands careful financial planning, proactive compliance, and adaptability in a world of increasingly regulated capital flows.

“A 5 per cent tax could significantly raise the cost of sending money home. A 10–15 per cent drop in remittance flows could result in a USD 12–18 billion shortfall for India annually.”— Ajay Srivastava, Global Trade Research Initiative


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