Currency Forward Contract | Definition, Booking, Cancellation & Basic Requirements

Currency Forward Contract | Definition, Booking, Cancellation & Basic Requirements

What Is a Currency Forward Contract?

A currency forward contract can be defined as buying or selling a specific currency at a specified future price for delivery on a specified future date.

Who Can Book a Currency Forward Contract?

Any importer or exporter having exposure to foreign currency can book a forward contract with its bank based on underlying (purchase order or pro forma invoice) to hedge his currency movement risk.

How to Book a Currency Forward Contract?

Step 1: On request, the bank set up a forward booking limit on behalf of its client. To set up the forward booking limit bank demands a fixed deposit of approx. 5% of your total booking requirements in the INR term. For example, if you want to book USD100000 then you will have to produce a fixed deposit of Rs. 375000.00 to your bank (considering USD/INR at 75.00). If you are a credit customer then the bank may also set up the limit based on your collateral mortgaged with the bank.

Step 2: You must produce an underlying (valid purchase order or pro forma invoice) mentioning the delivery and payment terms before your bank to book a currency forward contract.

Step 3: The Bank gives you a forward rate and with your consent, book the same. For example, if you want to book USD 100000 for delivery after the end of 3 months. Considering the current USD to INR spot rate of 75.00, the bank may give you a forward rate of 75.90. Here 0.90 is the premium for three months. Please note that exporters get the benefit of premium and importers have to pay the premium because USD is almost on premium in comparison to INR. You may refer to ibrlive.com for live forward rates.

Step 4: On successful booking of the contract bank agrees, generally on a 100 Rs. Stamp paper. The agreement contains all details of the contract and it is signed by both the bank and the client.

How Currency Forward Contracts Are Utilized?

On successful arrival of payment against export or sending the payment for import on the maturity date of the forwarding contract, the bank gives you the same rate which was booked earlier under the forwarding contract irrespective of the current spot rate on the maturity date.

A forward contract can be utilized for other payments irrespective of the underlying (purchase order or pro forma invoice) on behalf of which it was booked.

Early utilization of forwarding contracts is also possible if your payment has come earlier than the expected date.

Where to Check Exact Forward Premiums and Forward Rates?

Many websites show the month-wise or broken date forward rates for a subscription basis. You may refer to ibrlive.com to know the exact premiums and final forward rate, even for broken dates.

Advantages of Currency Forward Contract

For importers & exporters, the main advantage of booking a currency forward contract is to hedge their foreign currency exposure from adverse movements.

Exporters booking a forward contract for USD to INR, EUR to INR, GBP to INR or any major currency get the benefit of a premium added to the present spot rate.

Can I Cancel a Forward Contract?

Yes, the forward contract can be cancelled on the maturity date or 3 days after the maturity date. Cancellation is done on a spot rate and any profit or loss will be passed on to the customer if the same is cancelled on or before the maturity date.

If the forward is cancelled any day between the 3 days grace period, then the profit will not be passed on to the customer but any loss will be recovered from his account.

A forward contract can also be cancelled before the maturity date. Apart from profit & loss calculation from spot day, the client will also have to forgo extra premium from the date of cancellation to maturity.

Limit of foreign currency one can take abroad for travel, business and education purpose

Limit of foreign currency one can take abroad for travel, business and education purpose

Traveling Abroad? Here’s How Much Foreign Currency You Can Take

Planning a trip abroad? Whether it’s a family vacation, a business meeting, or studies, there are limits on how much foreign currency you can take with you from India. This guide will outline the regulations set by the Reserve Bank of India (RBI) for carrying foreign currency.

The amount of foreign currency that an individual can take abroad for a private visit is:
  • Any resident in India can take up to USD 250000 or equivalent in a financial year under the liberalized remittance scheme by RBI. USD 250000 as of 15.08.2021 is equivalent to Rs. 1,85,61,500.
  • There is no limit on several travels but in any case, the limit should not exceed USD 250000 per financial year.
  • The limit is available for individuals and not for a family. So, if there are four members in a family then each member can take USD 250000 per visit, but this limit can not be combined.
  • Foreign currency notes and coins only up to USD 3000 can be carried by an individual per visit and the rest amount for USD 247000 can be carried in the form of Drafts, Store value cards, travel currency cards, and travelers’ cheques. Use a real-time currency calculator to get INR value.
  • International credit cards and debit cards can also be used abroad under the total limit of USD 250000 per year.
  • The air tickets bought in India in INR for travel to any foreign country will be a part of the individual’s overall limit of USD 250000/-.
  • Currency notes up to Rs. 50000 can be purchased in cash and the balance can be purchased through cheques, RTGS, or bank transfers.
  • For traveling to Nepal and Bhutan one can carry the currency notes of Rs. 100 and below denominations up to any limit. One cannot carry Rs. 500 and Rs 2000 notes for more than Rs. 25000.
  • Travelers returning to India from a foreign trip need to surrender the unspent foreign currency notes and travelers’ cheques within 180 days of the return date, but they can retain USD 2000 only for the next visit.
  • No need to surrender coins. They can be retained forever.
The allowable amount of foreign currency for a business visit abroad is:
  • For business travel to foreign countries, resident Indians can take up to USD 250000 in a financial year.
  • There is no limit on several travels but in any case, the limit should not exceed USD 250000 per financial year. This limit can be exhausted in a single visit also.
  • Foreign currency notes and coins only up to USD 3000 can be carried by an individual per visit and the rest amount of USD 247000 can be carried in the form of Drafts, Store value cards, travel currency cards, and travelers’ cheques.
Amount of foreign currency one can take for studying abroad:
  • For study abroad, one can remit up to USD 250000 in a financial year under the LRS scheme.
  • This limit includes the following expenses:
  1. Remittance to universities or colleges for education fees and hostel fees.
  2. Expenses for food, stay, and other personal expenses.
  • Tickets booked for traveling abroad from India.
  • If the course fee is more than USD 250000, then Authorized Dealers (Banks & FFMCs) may permit the remittance over and above USD 250000 without prior approval of RBI, based on the evidence provided.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 powerful strategies of booking currency forward contract for exporters

10 powerful strategies of booking currency forward contract for exporters

Booking a currency forward contract hedges your adverse currency movement risk, but by adopting the following strategies you may earn good profits out of it.

Always book partial exposure:

Booking a partial exposure is always a good idea. For example, if you are expecting an inward payment of USD 100000 then you may book 50% of your exposure i.e. USD 50000, and keep USD 50000 open.

This strategy will balance your currency exchange rate. If the current spot rate on the date of payment is above your booking rate then you have another USD 50000 to get that rate and vice versa.

 

Booking heavily when domestic currency has depreciated a lot recently:

If the domestic currency (INR) has depreciated a lot(more than 2% to 5%) recently, you should book your upcoming & future exposure.

For Example, if the USD/INR pair has recently moved to 75 from 72 Rs. In this case, the domestic currency INR has depreciated by almost 4% and is supposed to appreciate in the future or will depreciate by a marginal amount.

So, booking most of your exposure for up to six months in that scenario is advisable.

 

Booking a little less than your expected payment:

If you are expecting a payment of USD 100000 then most likely you will receive a little less because of correspondent bank charges.

You may receive an amount of USD 99950 in your bank’s Nostro account. So if you are planning to book the entire exposure then always book USD 500 less than your expected payment to avoid cancellation of the extra amount and charges thereon.

 

Check the exact premium before booking a currency forward contract:

You should check the exact premium before booking a contract so that you get exactly what is available in the market. You may refer to currency websites like ibrlive.com which displays the live forward rates.

 

Always opt for a one-month window:

For example, if you are booking a USD to INR forward contract for USD 100000 for a maturity on 20.09.2021 then you should ask your bank to provide a complete month window. You will get a window of one month starting from 20.09.2021 to 19.10.2021.

Please note that this window is provided because sometimes foreign payments can be delayed due to any reason. You will get a premium only till the start date i.e. 20.09.2021 but all your inward payments up to USD 100000 from 20.09.2021 till 19.10.2021 can be converted on the booking rate.

 

Never do booking more than your currency exposure:

For example, if you are expecting a payment of USD 100000 and you are finding the rate very attractive, never book more than your expected payment. Because no one can predict currency movements. In case of adverse movement, you may lose money for cancellation of the extra booking.

 

Book continuously:

Booking continuously is another good practice to follow. Booking currency forward contracts regularly helps to balance your currency rate.

 

Booking immediately after receiving the purchase order:

One should book immediately a partial amount of the contract after receiving the purchase order. This helps you prevent losses on account of adverse movement.

 

Book for a shorter duration when expecting an appreciation in domestic currency:

if you are expecting a depreciation in domestic currency in a short span then you should book contracts for a shorter duration like for 15 days to 1 month.

 

Book for a longer duration when expecting a depreciation in domestic currency:

If you are expecting an appreciation in domestic currency then you should book contracts for a longer duration like for 2 months to 6 months.

 

So by following the above strategies, you may hedge currency exposure along with saving extra money. Please note that you should not completely rely on the above strategies as it is the author’s view. You may follow your strategies as well to form the right decision.

Tax collected at source (TCS) on remitting money abroad under liberalized remittance scheme (LRS)

Tax collected at source (TCS) on remitting money abroad under liberalized remittance scheme (LRS)

The tax collected at source (TCS) on remitting money abroad under a liberalized remittance scheme (LRS)

What is TCS?

Tax Collected at source is the excess amount collected in the form of tax by the seller of goods from the buyer at the time of selling of goods over and above the sale price. Collected Tax then remitted to the government value.

Is TCS applicable on foreign remittances? – Yes, as per section 206C(IG) of the Income Tax Act, 5% TCS is applicable on sending money out of India for more than Rs.7 lakhs in a financial year under the Liberalised Remittance Scheme of RBI. In the absence of Aadhaar or PAN while remitting money abroad, 10% TCS is charged by authorized dealers. This rule has been affected since Oct 1, 2020.

Are different overseas transactions eligible for TCS? – All permitted current & capital account transactions for individuals under LRS will attract TCS of 5% if the remittance amount is equal to or more than 7 lac rupees. All such remittances on which TCS is applicable are detailed below:

  1. Current Account Remittances:
  • Money sent for overseas education
  • Money sent for Gifts & Donations
  • Money sent for medical treatment abroad
  • Money sent for family maintenance
  • Money loaded & reloaded in travel card (Forex Card)

 

  1. Capital Account Remittances:
  • Loan to relatives
  • Investment in overseas shares & mutual funds
  • Investment in properties abroad

Please note that TCS(tax collected at source) at only 0.50% will be applicable for money sent for education purposes out of education loans taken from any financial institute. For example, if money remitted is Rs. 10 lacs out of an education loan taken from the bank, then TCS will be applicable at 0.50% on Rs. 3 lacs (Up to Rs. 7 Lacs TCS is not applicable) which comes to Rs. 1500/-.

Please also note that a limit of Rs. 7 lacs is for the entire financial year. For example, a person sends CAD 10000 (Rs. 6 Lacs at a conversion rate of Rs. 60 per CAD) from India to his son living in Canada on 05.04.2023 and sends CAD 10000 (Rs. 6 Lacs at a conversion rate of Rs. 60 per CAD) again on 10.10.2023 in the same financial year, then a TCS of 5% will be applicable on Rs. 5 Lacs (Total money sent Rs. 12 lacs, free limit Rs. 7 lacs, Taxed amount Rs.5 lacs.) which comes to Rs. 25000/-

Is TCS applicable for the import & export of goods & services?

No, TCS is not applicable for the import & export of goods & services. TCS(tax collected at source) is also not applicable for overseas direct investment in joint ventures & wholly owned subsidiaries by private limited companies, limited companies, LLPs & registered partnership firms.

Is TCS also applicable on overseas tour packages?

Yes, TCS( tax collected at source) at 5% is applicable on overseas tour packages and there is no free limit of Rs. 7 lacs. Any tour & travel operator should collect TCS at 5% from the buyer of the overseas tour package regardless of the amount of the package.

Can I claim a refund for TCS?

Yes, the amount paid by the buyer of foreign exchange by way of TCS will be reflected in his 26AS statement after the seller files his TCS(The tax collected at source) Return. Buyer can claim the refund while filing an income tax return in case the buyer does not any tax liability. Thus, the TCS amount will be refunded after filing of Income Tax Return.

The latest changes in the TCS slab were announced by Hon’ble Finance Minister Nirmala Sitharaman in the union budget 2023-24 on 1st Feb 2023. Please note that all the changes mentioned below will become effective from 1St July 2023.

  • 20% TCS will be applicable for all overseas remittances except for education & medical expenditures that too without any threshold limit of 7 lacs.
  • Remittances under a liberalized remittance scheme for family maintenance and GIFT, Investment in shares, properties & mutual funds will attract a flat TCS rate of 20% irrespective of the amount of transaction.
  • Remittances for overseas education & medical treatment are kept the same as previously with only 5% TCS over 7 lacs of the transaction amount.
  • Overseas tour packages will now become costlier as the TCS limit has been increased to 20% irrespective of the amount from 5% earlier.

 

Let us understand this with the help of the table given below:

Nature of Overseas Transaction Existing TCS Rate New TCS Rate (with effect from 1st July 2023)
Remittance for education 5% on the amount over Rs. 7 Lakh Unchanged
Remittance for education (Where the source of funds is an education loan) 0.50% on the amount over Rs. 7 Lakh Unchanged
Remittance for family maintenance, GIFT, Investment in shares, properties & mutual funds 5% on the amount over Rs. 7 Lakh 20% without any threshold
Overseas tour package 5% without any threshold limit 20% without any threshold

 

 

 

 

 

 

 

 

Unveiling the World’s Strongest Currencies: The Global Economic Powerhouses of 2024

Unveiling the World’s Strongest Currencies: The Global Economic Powerhouses of 2024

In the ever-changing landscape of global economies, currencies play a pivotal role in defining a nation’s financial strength and global influence. As we step into 2024, it’s time to explore the top 10 most powerful currencies that are dominating the international financial markets. From the mighty currencies of economic giants to the surprising contenders, this blog unveils the highest-valued currencies in the world and the countries that wield them.

  1. Kuwaiti Dinar (KWD)

With an exchange rate of 1 KWD to 3.29 USD, the Kuwaiti Dinar proudly claims its spot as the strongest currency in the world. Boasting a robust oil-dependent economy and a prudent fiscal policy, Kuwait’s currency has maintained its stability and immense purchasing power, securing its place at the top.

  1. Bahraini Dinar (BHD)

Ranked second on our list, the Bahraini Dinar stands tall with an exchange rate of 1 BHD to 2.65 USD. Benefiting from its diversified economy and strong financial services sector, Bahrain has successfully forged its currency into a symbol of financial might and economic prowess.

  1. Omani Rial (OMR)

Claiming the third spot is the Omani Rial, exchanging at 1 OMR to 2.60 USD. Oman’s commitment to economic diversification and prudent monetary policies has bolstered the value of its currency, making it a formidable contender in the global financial arena.

  1. British Pound Sterling (GBP)

As the highest-value currency in India, the British Pound Sterling commands respect with an exchange rate of 1 GBP to 1.45 USD. Despite the challenges posed by Brexit, the UK’s stable economy and London’s status as a global financial hub continue to fortify the Pound’s position on the world stage.

  1. Euro (EUR)

With an exchange rate of 1 EUR to 1.22 USD, the Euro remains a dominant force in the global currency market. Representing 19 European Union member countries, the Eurozone’s economic strength and stability contribute to the currency’s widespread use and appeal.

  1. Swiss Franc (CHF)

Known for its safe-haven status, the Swiss Franc boasts an exchange rate of 1 CHF to 1.10 USD. Switzerland’s reputation for financial stability, a robust banking system, and a strong economy make the Franc a popular choice for investors during uncertain times.

  1. US Dollar (USD)

As the world’s primary reserve currency, the US Dollar stands strong with an exchange rate of 1 USD to 1 USD (parity). Despite facing challenges from other rising currencies, the United States’ economic prowess and global influence keep the Dollar in a prominent position.

  1. Jordanian Dinar (JOD)

The Jordanian Dinar secures its place on the list with an exchange rate of 1 JOD to 1.41 USD. Jordan’s strategic location and stable economy have contributed to the steady rise of its currency’s value.

  1. Cayman Islands Dollar (KYD)

Surprising many, the Cayman Islands Dollar boasts an exchange rate of 1 KYD to 1.25 USD, making it one of the strongest currencies in 2023. The Cayman Islands thriving financial services industry and favorable tax environment have fueled the currency’s growth.

  1. Gibraltar Pound (GIP)

Rounding off our list, the Gibraltar Pound exchanges at 1 GIP to 1.21 USD. Gibraltar’s status as a British Overseas Territory with a thriving offshore financial center has bolstered the value of its currency.

Conclusion

As the global economic landscape evolves, the strength and value of currencies play a pivotal role in shaping a nation’s financial power and global influence. The currencies listed above represent countries with stable economies, prudent fiscal policies, and diversified economic foundations. Whether they owe their strength to natural resources, financial services, or stable political environments, these currencies stand tall as the top 10 most powerful in the world in 2023, capturing the attention of investors, traders, and economic enthusiasts alike.

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Read This also: https://ibrlive.com/unveiling-the-best-dollar-to-rupee-live-rates-with-ibrlive-a-comprehensive-review/