Proposed US tax casts shadow over remittances to India

India largest recipient of remittances may lose billions in earnings

Remittances from the Indian diaspora around the world have long supported families, fuelled investment and strengthened Indian foreign reserves. But with United States President Donald Trump proposing a tax on remittances, the flow to India may be curtailed, with serious implications for the Indian economy.

On May 22, the United States House of Representatives passed a sweeping legislative package dubbed the ‘One Big Beautiful Bill’, the pet legislative project of United States President Donald Trump, that is aimed at overhauling key areas of American policy, from taxes and spending to border security.

At its core, the bill seeks to make permanent the tax cuts introduced during Donald Trump’s first presidency in 2017. But beyond that, it also introduces a slew of new tax breaks, such as deductions for tips, overtime, and even car loan interest. While it is being packaged as a financial relief plan, tucked deep in its 1,000-plus pages is a provision that could hit the Indian diaspora where it hurts, a 3.5 pc excise tax on remittances.

If passed by the Senate and signed into law by Trump, potentially as early as July, before the August recess, the Remittance Transfer Excise Tax would come into effect on January 1, 2026. It targets funds transferred out of the US by non-citizens, with exemptions granted to US citizens.

For an estimated 4.5 million Indian-origin people living in the United States of America (USA), this could mean a significant dent in their finances. Whether it is sending money back home to support families or investing in property and businesses in India, they will now be taxed 3.5 pc on any remittances sent from new year onwards.

Vikas Verma, an economist at the Centre for World Trade Organisation Studies, a research and capacity-building institution in Delhi , believes that the new tax structure can lead to potential decline of remittance inflows, which will affect household investments in various areas.

“The new tax could reduce remittance inflows, cutting disposable income for families who rely on it. Since India’s economy is largely consumption-driven, this may hurt overall demand. It could also lower the national saving rate, limiting banks’ ability to lend and potentially slowing investment,” Verma tells Media India Group.

According to the World Bank, India received a record-breaking USD 129.4 billion in remittances in 2023 the highest annual inflow ever recorded by any country, with the December quarter alone accounting for USD 36 billion. India has remained one of the top global recipients for over 25 years, following the boom in the Information Technology sector since the 1990s, and has consistently held the top position since 2008. In 2023, Mexico ranked second with USD 68 billion, while China followed with an estimated USD 48 billion.

A survey by the Reserve Bank of India, India’s central bank, shows that the United States remained the largest source in 2023–24, contributing nearly USD 32 billion, about 28 pc of India’s total inflow of USD 118.7 billion.

As a result, the proposed tax could disrupt this crucial flow and prompt NRIs to reconsider how and where they manage their funds. Dr Radha Raghurampatruni, geopolitical analyst and associate professor at GITAM University, Visakhapatnam, in Andhra Pradesh, notes that with such substantial remittances, the move could impact investments in India’s booming real estate market.

“Remittances are vital for India’s economy, they help bridge the financial deficit and build a buffer against external shocks. The RBI projects remittances could reach USD 160 billion by 2029. A 3.5 pc proposed tax on remittances could cost India up to USD 1.8 billion annually. This would just impact inflows, it could hurt NRI investments in real estate, stocks, Fixed Deposits and government bonds, while also affecting forex reserves, the rupee’s stability, and even immigration-linked family incomes,” Raghurampatruni tells Media India Group.

However, Tanu Goyal, senior fellow at the Indian Council for Research on International Economic Relations, says that while the policy may have drastic initial effects, it is likely to stabilise over time.

“In 2023–24, the US contributed nearly a quarter of India’s total remittance inflows, and its share has steadily grown over the past decade. With most Indian migrants in the US working in high-income jobs, the proposed remittance tax will likely have a short-term negative impact at the macro level. But this effect should be assessed over time, not just in the first year. The initial transition year usually sees the sharpest impact, but people adapt, by staggering transfers during currency dips, carrying permissible cash or even renegotiating contracts to offset financial strain,” Goyal tells Media India Group.

As per Shravani Prakash, a Bengaluru-based consultant, this policy would not only apply to those holding green cards or H-1B visas, but would also extend to Indian students.

“Many NRIs have begun giving back to the communities of their origin by funding social and grassroots initiatives, especially in their home villages, but this could be discouraged, at least for now. Indian students in the U.S. may be among the hardest hit, especially those repaying education loans to Indian banks. The 3.5 pc remittance tax could add a significant burden. In fact, some lenders are already growing cautious, worried about US admission uncertainties and students’ ability to meet repayments under the new policy,” Prakash tells Media India Group.

According to Raghurampatruni, the law is here to stay and is not merely a temporary measure.

“The ‘One Big and Beautiful Bill Act’ is a comprehensive package to make the 2017 tax cuts permanent, expand tax credits, and address energy, healthcare, and border security. It also includes a refundable excise tax credit for taxpayers with valid Social Security numbers,” adds Raghurampatruni.

Goyal believes that while policies may change frequently, but that does not necessarily make them temporary.

“This measure is not ad-hoc, it seems here to stay, unless it is bargained away as part of a larger deal. Many countries already tax remittances, so reciprocal reductions or removals are possible. It also fits into the broader ‘America First’ agenda, which is likely to appeal to US citizens. Plus, with the federal budget deficit expected to grow, any additional tax revenue will be seen as useful,” adds Goyal.

Verma believes that if the law is implemented, it could lead to a surge in informal channels and unofficial money transfer methods among NRIs.

“We do not know yet. President Trump’s policies often come with a lot of uncertainty, he tends to go back and forth on decisions. So, it is unclear whether this tax, if implemented, will actually stick or if India might get an exception through a bilateral trade agreement. What is more concerning is that it could push many NRIs, especially low-income earners and migrant workers, to turn to informal or unofficial money transfer channels, making them more vulnerable to fraud,” adds Verma.

However, according to Goyal, the use of informal channels for money transfers is likely to remain limited.

“That is possible, but likely only in smaller amounts, especially with greater financial transparency. The tax is not high enough to justify serious risk. Some may start carrying more cash within legal limits, like before, though online transfers remain cheaper and easier. Since the tax applies only to non-US citizens, many might rely on friends or relatives with US citizenship to send money on their behalf and reimburse them later. In fact, some startups are now exploring ways to enable NRIs to deposit in the country and withdraw in their Indian accounts,” adds Goyal.

USA’s motive behind the remittance tax

While the proposed tax may alter how NRIs handle cross-border transfers, it also signals deeper economic and political priorities. Experts suggest the US is looking to bolster domestic funding and reinforce its tightening stance on immigration.

“The US government is targeting immigrants in general, so possibly it is a tool to discourage migration. The timing is interesting as India is currently negotiation a trade deal with the US and this could be used as a point to bargain a tariff reduction on certain commodities or a better deal for American businesses in other areas,” adds Prakash.

“The most likely reason is that the U.S. government is trying to reduce its massive debt, which currently stands at USD 36 trillion. The ‘One Big Beautiful Bill’ includes more tax cuts for its domestic population, so to finance that spending, they are looking to raise revenue through international tariffs and taxes. In fact, the bill is projected to add over USD 3 trillion to the US debt over the next decade, so they are turning to the outside world to help bridge that gap,” adds Verma.

According to Raghurampatruni, the move appears to be a combination of fiscal conservatism extending tax cuts for corporations and individuals, while initiating a rollback of certain policies introduced during the Biden administration.

“The bill reflects fiscal conservatism, extending tax cuts, while rolling back Biden-era policies. It removes green energy incentives from the Inflation Reduction Act, adds barriers to medicare access, cuts SNAP benefits, and shifts responsibility to states. It also directs funds to the U.S.–Mexico border wall, allocates USD 4 billion for more border patrol agents, and introduces a USD 1,000 fee for asylum seekers, all aiming to curb migration and reinforce the ‘America First’ agenda,” adds Raghurampatruni.