NEW DELHI, Jun 13: Remittances have long served as a cornerstone of India’s economy, regularly offsetting nearly half of the country’s merchandise trade deficit. More stable than foreign direct investment (FDI), these cross-border financial flows have consistently outpaced FDI inflows, making them one of the most reliable sources of external funding for India.

According to World Bank estimates, Indian expatriates remitted a record $119 billion in 2023. The United States remained the single largest source, contributing 27.7% of India’s total remittances in FY24, approximately $33 billion.

However, a newly proposed U.S. tax on remittances threatens to disrupt this critical pipeline. The U.S. House of Representatives recently passed a bill that would impose a 3.5% tax on all foreign money transfers by non-citizens. This category includes H-1B and L-1 visa holders, international students on F-1/J-1 visas, green card applicants, and other temporary residents. If approved by the Senate, the tax will take effect on January 1, 2026.

“US-based Indians sent $33 billion back home in FY24. But from 2026, every dollar may attract an extra 3.5% remittance tax,” noted TaxBuddy, an income tax and e-filing platform.

The financial implications for Indian-origin residents in the U.S. are significant. Under the proposed tax, $3.50 would be deducted for every $100 remitted. A typical transfer of $10,000 would result in a $350 loss—funds that would otherwise go toward education, medical expenses, housing, or savings for families in India.

While the measure is intended to help reduce the U.S. fiscal deficit, its economic aftershocks could be felt across borders. The estimated Rs 2.75 lakh crore ($33 billion) in annual remittances from the U.S. could translate into nearly Rs 10,000 crore in new tax revenues for Washington, but at a considerable cost to Indian senders and recipients.

If enacted, the tax could reshape India’s remittance economy, especially as over 5 million Indian immigrants in the U.S. stand to be affected. These individuals are among the highest-earning NRI (Non-Resident Indian) groups and play a crucial role in driving consumer spending, NRE (Non-Resident External) deposit growth, and India's foreign exchange reserves.

To illustrate the personal cost: if an individual sends Rs 1 lakh to India after 2026, only Rs 96,500 would be received—the remainder deducted as tax by the U.S. government. This figure excludes additional transaction or banking fees.

Experts estimate that the proposed tax could lead to a $1.16 billion drop in annual remittances from the U.S., triggering a twofold multiplier effect and an indirect economic impact of nearly Rs 19,886 crore on sectors such as real estate, banking, and retail.