What Is the Definition of Remittance?

Remittance refers to the transfer of money, typically from an individual in one country to another individual in a different country. These transfers are often non-commercial, meaning they do not involve the exchange of goods or services. The primary purpose of such a transfer is usually to provide financial support to family members or dependents residing in the home country.

What is Remittance

These transfers are a source of income for recipients, particularly in developing economies, often constituting a portion of a household’s financial resources. The money supports daily living expenses and contributes to economic stability for millions globally. Unlike other financial flows, remittances are often stable and countercyclical, increasing during economic downturns or after natural disasters.

In the United States, if you receive a remittance, it is considered a gift and is not taxable income to the recipient. However, a sender in the U.S. might have reporting requirements to the Internal Revenue Service (IRS) if the total amount sent to an individual in a calendar year exceeds the annual gift tax exclusion amount, which is $18,000 as of 2024. This reporting obligation falls on the sender, not the recipient, and does not result in a gift tax unless very large lifetime exclusions are exceeded.

A new federal remittance tax of 1% on certain outbound transfers from the U.S. is set to take effect on January 1, 2026. This tax applies specifically to transactions initiated using physical instruments like cash, money orders, or cashier’s checks, and will be collected by the service provider. Electronic transfers, such as those from U.S. bank accounts or using U.S. debit and credit cards, are exempt from this new tax.

How Remittance Works

The process of sending a remittance begins with the sender initiating the transfer through a chosen service provider, such as a bank, money transfer operator, or an online platform. The sender provides the amount they wish to send in their local currency and specifies the recipient’s details and preferred method of receiving the funds.

Once the transfer is initiated, the service provider converts the funds into the recipient’s local currency using their exchange rates. The money is then transmitted through the provider’s network to the destination country. This process includes compliance checks to adhere to regulations like Know Your Customer (KYC) and Anti-Money Laundering (AML) standards.

The recipient then receives the funds through their chosen method, which could be a direct deposit into a bank account, a credit to a mobile wallet, or cash pickup at a local agent location. The time for a remittance to reach the recipient varies, from minutes for digital transfers to several business days for traditional bank transfers, influenced by factors like time zones and banking holidays.

Transaction fees cover processing and currency conversion. These fees can be fixed, percentage-based, or include an exchange rate markup. The global average cost for sending remittances is around 6% to 10% of the amount sent, fluctuating based on the transfer method, destination, and service provider.

Common Uses of Remittance

Remittances serve various practical purposes for recipient households, addressing immediate financial needs and improving living standards. A portion of these funds is used for essential consumption, such as purchasing food, covering housing expenses, and securing basic necessities. This direct support helps families maintain a stable household income and avoid poverty.

Beyond daily expenses, remittances are allocated to education and healthcare. Families often use the transferred funds to pay for school fees, educational supplies, and medical treatments or medications. This investment in human capital contributes to better long-term outcomes for individuals and communities.

Remittances also play a role in economic development. While much of the money covers basic needs, a portion can be saved or invested in income-generating activities, such as starting small businesses or improving agricultural practices. These investments can create local jobs and stimulate economic growth, particularly in rural areas.

In times of crisis, such as natural disasters or economic downturns, remittances often increase, providing a safety net for affected families. They help cover unexpected expenses and support recovery efforts, demonstrating their countercyclical nature and importance as a resilient source of financial aid.

Types of Remittance

Remittances can be sent and received through several distinct channels. Traditional bank transfers utilize financial networks like SWIFT. These transfers are secure and suitable for larger sums, though they can involve higher fees and longer processing times, ranging from one to five business days.

Money transfer operators (MTOs) allow senders to deposit cash or use electronic payments, with recipients often collecting funds in cash at agent locations globally. These services are known for their speed and accessibility, particularly for individuals without traditional bank accounts.

Mobile money and online platforms are popular digital methods. Mobile money services allow transfers directly to a recipient’s mobile wallet for payments or cash withdrawals. Online platforms, accessible via websites or mobile applications, facilitate transfers directly between bank accounts or digital wallets, often with lower fees and faster processing.

Other forms include transfers via checks, which are typically the slowest. Some commercial entities also use similar mechanisms for business remittances.