Used primarily in a context of overseas transactions, a remittance is strictly defined as any payment or gift. However, whilst its meaning is technically broad, people and governments tend to define remittance in a more specific way. So, what is remittance?
The most familiar remittance meaning is a payment that is sent by someone living abroad to their family or friends in their home country. In this article, we’re going to take a look at these in detail, from how they work to why they matter.
What is a Remittance Payment?
A remittance payment is any sum of money that is sent from one party to another. However, the way that the term is used these days is a little stricter.
In most cases, if you are speaking of a remittance, you usually mean a payment that is sent from a migrant living abroad to their family or friends back in their home country. India is the country that is the largest recipient of remittances in the world, according to the World Bank, and in over thirty countries incoming remittances make up over 10% of the GDP.
However, there is another remittance definition. In a world in which business increasingly crosses borders, remittances are used for business payments and the payment of invoices too. This, however, is much less common.
What is an Example of a Remittance?
Imagine, for instance, that you moved from Bulgaria to the UK for work. You decide to send back to Bulgaria 25% of your income, to your mother and father, or to anyone else in your family. Each time you send a sum back, that’s a remittance.
The same works the other way too. If you rent out a property in Bulgaria, say, and you use some of the money you earn from that to pay for a service in the UK, that is also a remittance. And, in the UK, that can have tax implications. In this respect, a remittance is not only a payment you send to your family.
What is the Difference Between Remittance and Payment?
The difference between a remittance and a payment is, in most cases, a matter of whether money is travelling overseas.
The word, “remittance”, comes from the verb, “to remit”, or to send back. So, whilst all remittances are payments, not all payments are necessarily remittances. The distinction matters for tax affairs if you are “non-domiciled” – meaning you have a permanent home outside the UK.
Conventionally speaking, however, a remittance is just an international payment or gift.
How Does a Remittance Work?
Remittances work in the same way as any other payment might work, as long as both parties involved have a bank account or access to some sort of service for transferring money.
To process a remittance, you can use one of the following options.
You can make a simple bank transfer from account to account for your remittance. These days, this is the easiest way to initiate payments. However, the SWIFT system and PayPal, two structures for sending money internationally, can be quite expensive – so, know what the rates are before you confirm.
Cash or a cheque
If the recipient does not have a bank account, you can pay using cash or a cheque via services such as Western Union or MoneyGram. These are usually quite expensive options and may not offer you the best exchange rate.
Credit, debit, or prepaid card
You can use any card to make a remittance. However, in conventional banks, these are not necessarily cheap either.
Prepaid cards, such as Revolut’s, offer the opportunity to send money abroad with no hidden fees and without rubbish exchange rates.
Conclusion: What is Remittance?
Remittances are those payments that cross national borders. In some cases, they can account for large proportions of a country’s GDP.
If you want to send or receive a remittance, make sure that you are aware of the tax implications. It’s a good idea to find the best rate for your transfer too – as remittances can sometimes cost you more than you were expecting.
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