What is Remittance?

What Is a Remittance?

A remittance refers to money that is sent or transferred to another party. The term is derived from the word remit, which means to send back. Remittances can be sent via a wire transfer, electronic payment system, mail, draft, or check.

Remittances can be used for any type of payment including invoices or other obligations. But the term is typically used to refer to money sent to family members back in a person’s home country.

How does remittance work?

Now that we know what remittance means, it is time to understand how it functions. Remittance is a major source of cash inflow for any country. The transfer of funds mainly benefits developing countries. The process is simple, wherein expats save a portion of their salaries and send it to their families living in their home country.

Remittance happens via a legal channel: mail, bank transfer, money order, or an authorised money transfer operator. The remitter or expatriate transfers the funds from the current country of residence to their family back home. The funds are automatically calculated and converted as per the prevailing exchange rates and credited to the receiver’s account in the home country’s currency.

What are the types of remittance?

Remittance can be one of the following two types:

Outward Remittance: When expatriates send money to their home country, the process is referred to as outward remittance Inward Remittance: The process of receiving this money by the expat’s family is called inward remittance

What is an Example of a Remittance?

Imagine, for instance, that you moved from India to the UK for work. You decide to send back to India 20% 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 Spain, 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 are the benefits of remittance?

Remittances cushion countries against financial setbacks. Here’s how:

1. Remittance tends to increase the purchasing power and consumption of a family. This results in access to better food, education, healthcare, housing and lifestyle among other things.

2. It directly benefits the recipients. There are no middlemen involved in the process, which reduces the scope of corruption. In fact, governments all over the world have introduced various tax-free accounts and other incentives to encourage foreign remittance through legal channels.

3. It improves a country’s per capita income and GDP.

4. Inward remittance is known to provide relief in times of natural calamities such as floods, earthquake, tsunami, etc.

5. The most significant benefit is that the remitter has complete knowledge of how and where their money is spent.

In most cases we can attribute the increase and decrease in money transfers to the economic crisis in the country. Trends show that a struggling economy encourages its country’s workforce to seek better avenues overseas. Another factor that can be credited to increased remittance is the relaxation on stringent migration laws. Today it has become easier and more affordable for people to migrate from one part of the world to another.


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