The Hidden Cost of Currency Conversion in India
When NRIs remit money home, or Indian freelancers receive USD payments via PayPal, Wise, or SWIFT, the rate shown on Google (the interbank spot rate) is never the rate you actually receive. Understanding the difference — and how to minimize it — can save thousands of rupees on every transaction.
The Bank Forex Spread
Banks operate on a buy/sell spread. When you receive foreign currency and want it converted to INR, the bank buys it from you at a rate lower than the live market rate — typically 1% to 2.5% below the interbank spot rate, depending on the bank and transaction size. If your bank may credit you less than the reference mid-market rate because of its spread and fees. Compare the final quoted rate before transferring large amounts.
GST on Currency Conversion
Under Indian GST rules, authorised dealer banks levy GST on the currency conversion service itself. The GST is calculated on slabs based on the gross INR value exchanged: 1% on the first ₹1 lakh (minimum ₹250), 0.5% on the next ₹9 lakh (up to ₹5,000 max), and 0.1% on amounts above ₹10 lakh (capped at ₹60,000 maximum). This adds a second layer of cost on top of the spread.
Remittance vs Conversion — Key Difference
If you're sending money from India abroad (outward remittance), the Liberalised Remittance Scheme (LRS) allows Indian residents to send up to $2,50,000 per financial year for permitted purposes (education, travel, investment). Under current LRS TCS rules, the annual threshold is ₹10 lakh. The applicable TCS rate depends on the purpose of the remittance and the current Income-tax rules, so verify the transaction-specific treatment before sending funds.
How to Get a Better Exchange Rate
For large transfers, compare rates across at least 3 channels before sending: your bank's forex rate, an authorised money changer (AMC), and platforms like Wise (formerly TransferWise) or Niyo which often offer rates much closer to the mid-market rate with flat fees instead of percentage-based spreads. On transfers above $10,000, even a 0.5% better rate makes a meaningful difference to what lands in the recipient's account.
TDS on Forex Transactions
For certain types of foreign payments (like payments to non-residents for services), the payer may be required to deduct TDS under Section 195 of the Income Tax Act before remitting — another consideration for businesses making regular cross-border payments. The applicable TDS rate depends on the nature of the payment and whether a DTAA (Double Taxation Avoidance Agreement) between India and the recipient country applies.