India taxes individuals based on a system of income slabs. Different tax rates are assigned to different ranges of income.&nbsp;

Understanding tax slabs is crucial for several reasons.

As a person earns more, the tax liability also increases, creating a fair and progressive tax system in the country. To achieve this, the government regularly updates and announces changes to tax slabs in the Union Budget.

The income tax slabs differ between the old and new tax regimes. Let's explore the specific slab rates applicable to Individuals for FY 2022-23 (AY 2023-24) and FY 2023-24 (AY 2024-25).

Income Tax Slab Rates For FY 2023-24 (AY 2024-25)&nbsp;

Rates of the old tax regime slabs are categorized into three groups:

The new tax regime applies uniform tax rates to all individuals, eliminating the age-based distinctions in the old system. The new tax regime slabs 2023-24 are outlined below.

Applicability of Surcharge for FY 2023-24 (AY 2024-25)

The income tax <a href="https://incometaxindia.gov.in/charts%20%20tables/tax%20rates.htm">surcharge</a> is an extra fee imposed on top of the <a href="https://www.skydo.com/blog/how-to-file-taxes-under-44ada?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">regular income tax</a>. An additional tax is applied to individuals with higher income earnings in a specific financial year. Let’s look at the applicable surcharge rate under the Old and New tax regime.

However, 25% or 37% surcharge rates will not apply to income under the following sections.

Consequently, the highest surcharge rate on the tax payable for such incomes will be 15%.

Starting from the Assessment Year 2023-24, the maximum surcharge rate on tax payable for dividend income or capital gain specified in Section 112 will be capped at 15%.&nbsp;

A 4% Health and Education cess will be applied to all cases’ total income tax liability and surcharges.

Comparison of tax rates under the New tax regime and the Old tax regime for FY 2022-23 (AY 2023-24)

How do you calculate the income tax from the income tax slabs?

Let’s understand the calculation with an example.

Sanjana, aged 35, has a total taxable income of Rs. 8,50,000. She has opted for the old tax regime. Her income includes income from salary, interest and rental income. Deductions under section 80 have been reduced. Now, Sanjana wants to know her <a href="https://www.skydo.com/blog/gst-requirements-international-service-sales?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">tax liability</a> for FY 2022-23 (AY 2023-24).

*Sanjana, an individual taxpayer under the age of 60, enjoys an income exemption limit of up to Rs 2,50,000. Other taxpayers, i.e., senior and super senior citizens, have higher income tax exemption thresholds of Rs 3,00,000 and Rs 5,00,000, respectively.

Please be aware that the tax rates in the New Tax Regime are uniform for all categories of individuals, including regular individuals, senior citizens, and super senior citizens.&nbsp;

Individuals with a net taxable income of up to Rs 5 lakh qualify for a tax rebate under section 87A, resulting in zero tax liability in both the New and Old tax regimes. It's important to note that in Budget 2023, the rebate under the new regime has been extended, making income up to Rs 7 lakh tax-free from the FY 2023-24 onward.

Let's delve into effective strategies to maximize your investments while minimizing the associated tax burdens.

ELSS mutual funds provide a dual benefit of potential capital appreciation and tax savings under Section 80C of the Income Tax Act. Investing in ELSS reduces taxable income and offers a path for long-term wealth growth.

2. Explore tax-efficient investment avenues

Health insurance qualifies for tax benefits under Section 80D. You can claim tax benefits on premiums paid - up to Rs 20,000 for senior citizens and Rs 15,000 for others. For example, if you pay Rs 15,000 for your policy and Rs 20,000 for your senior citizen parent, you can claim a total tax benefit of Rs 35,000.&nbsp;

Maturity value is tax-free for sums received under critical illness insurance policies.

This strategy entails selling loss-making assets to realize the capital loss and using it to offset the gains earned by profit-making assets.

For instance, if you have a loss of Rs. 20,000 in Stock A and a gain of Rs. 30,000 from Stock B, you can sell Stock A during a market downturn to offset the gains. This way, you can reduce your taxable income. The saved amount can be reinvested for portfolio growth.

Ensure that tax loss harvesting aligns with your overall financial goals and plan by considering a discussion with a financial professional or tax advisor.

<a href="https://www.skydo.com/blog/how-can-the-right-chartered-accountant-help-your-tech-export-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Consult financial professionals or tax advisors</a> for effective tax planning and strategic advice. Their expertise can provide tailored insights aligned with your financial goals and ensure a well-informed approach to optimize your tax situation.

If you need help deciding what is right for you, we will connect you with our panel of Indian and US-based CA / CPAs. Feel free to reach out to us.

Q1. How is a taxpayer's income categorized?

Ans: A taxpayer's income falls into five categories outlined in Section 14 of the Income Tax Act. These include Income from salary, Profits from a business or profession, Income from House Property, Capital Gains, and Income from Other Sources.

Q2. Is it possible to avail of 80C deductions while choosing the new tax slabs 2023-24?

Ans: No, under the new tax regime, several deductions and exemptions, including those under section 80C, are not permitted. Opting for the new tax regime means foregoing the ability to claim deductions under section 80C.

Q3. What do "Previous Year" and "Assessment Year" mean?

Ans: We have two important terms in income tax provisions: (i) Previous Year and (ii) Assessment Year. Previous Year is when you earn income, typically from April 1st to March 31st. The year right after the Previous Year, from April 1st to March 31st, is called the 'Assessment Year.'

For example, the Previous Year is from April 1, 2023, to March 31, 2024 (FY 2023-24). The corresponding Assessment Year is from April 1, 2024, to March 31, 2025 (AY 2024-25).

Q4. What is the tax exemption limit for calculating income tax rebate under section 87A?

Ans: For FY 2023-24 (AY 2024-25), the rebate limit has been increased to Rs. 7,00,000 under the new tax regime. This means a resident individual with taxable income up to Rs 7,00,000 will receive Rs 25,000 or the amount of tax payable (whichever is lower) as tax relief. However, the old tax regime's threshold limit will remain the same, i.e., Rs 12,500 if taxable income is up to Rs 5,00,000.

Q5. How much is the standard deduction for FY 2023-24?

Ans: You can claim a standard deduction of ₹50,000 to the income taxable under the head ‘Salaries.’ The standard deduction is a tax benefit that can be claimed irrespective of the amount spent on Transport or Medical Allowance. It applies to individuals earning a salary or pension income.

Prepare for the upcoming year's tax season by understanding the tax slabs for 2023-24 and optimizing your tax savings. 

Tax Slabs in 2023-24: Plan Ahead for Next Year Tax Savings

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Rohit Khuranna

In the dynamic world of Information Technology (IT) services, success relies on technical expertise and robust financial management. IT service providers must have a firm grasp of the required accounting documents. This paperwork encapsulates critical financial information, facilitating precise decision-making and ensuring compliance with tax regulations. They are the backbone of economic health, enabling IT service providers to set sail confidently towards success.

A Purchase Order (PO) represents an official request from the buyer to the supplier to procure specific goods or services. The Purchase Order outlines critical details such as the type and quantity of items required, agreed-upon prices, delivery terms, payment conditions, and other essential terms and conditions.

For an IT services export company, purchase orders are focal in ensuring smooth operations and maintaining healthy client relationships. When an IT export service provider receives a purchase order from a client, it acknowledges the client's commitment to acquiring the specified services. Therefore, it creates a sense of security for the service provider, as the terms now bind the client.

Moreover, IT service industry purchase orders help streamline the procurement process. They provide clear instructions to suppliers, reducing the risk of misunderstandings and ensuring that the requested services or products are delivered accurately and on time.&nbsp;Using <a href="https://www.controlhub.com/purchase-order-software">purchase order software like ControlHub</a> further enhances this process by automating order management, tracking, and documentation, saving valuable time and reducing errors.

Proforma Invoices: The Preliminary Picture

Proforma invoices are essential financial documents used in the early stages of a business transaction. Unlike final invoices, proforma invoices are not legally binding; they serve as a preliminary outline of the terms and conditions of a potential sale or service engagement. These invoices provide buyers with an estimate of the costs involved before the actual transaction.

These invoices are crucial in IT services, particularly in cross-border transactions. When dealing with international clients, proforma invoices become invaluable for customs clearance and international trade compliance. They assist clients in understanding the scope of the proposed services and the associated costs, enabling them to make informed decisions before proceeding with the purchase.

Many founders and business owners may find this aspect confusing. The timeline to share proforma <a href="https://www.skydo.com/blog/transforming-your-invoicing-experience-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">invoices</a> is before the goods are delivered or commenced services. They prelude the final transaction, giving clients sufficient time to review and confirm their orders.

Although proforma invoices are not considered official tax documents, they can impact GST compliance. IT service providers must ensure that the proforma invoice or e-invoice<a href="https://www.skydo.com/blog/what-is-e-invoicing-under-gst-and-who-needs-to-generate-it?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link"> includes accurate GST</a> details, such as GST rates and applicable taxes, to maintain transparency with clients and avoid discrepancies during the final invoicing process.

An invoice is crucial in the IT service industry because it formalises the exchange of goods or services for monetary compensation. It provides concrete evidence of a completed transaction. It ensures that the IT service provider and the client are on the same page regarding the terms, deliverables, and agreed-upon costs.

An <a href="https://www.skydo.com/blog/how-to-implement-e-invoicing-what-the-reduced-threshold-of-rs-5-crores-means-for-your-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">effective invoice</a> should include several key components: the IT services' details, with itemised descriptions and corresponding costs. Additionally, the invoice or e-invoice should specify the payment terms, such as due date and accepted payment methods, to facilitate timely payments and cash flow management.

For IT service providers, revenue recognition is decisive for accurate financial reporting and decision-making. Invoices mark the point of revenue recognition, indicating the delivery of services or milestones achieved.

For Indian IT service providers, GST is a significant factor in financial transactions. Invoices must comply with <a href="https://www.skydo.com/blog/what-is-e-invoicing-under-gst-and-who-needs-to-generate-it?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">GST regulations</a>, including the proper Goods and Services Tax Identification Number of the service provider and the client and accurate GST rates for the services provided.

A credit note is a corrective document issued by a seller to a buyer, indicating a reduction in the amount owed for various reasons, such as errors, refunds, or discounts.&nbsp;

In IT services, credit notes are the remedy when discrepancies arise, such as overbilling, inaccurate invoicing, or the need for refunds. They provide an official record of the adjustments made, rectifying the previous transaction and ensuring that the client's account accurately reflects the revised financial status.

By issuing timely credit notes, IT service providers also demonstrate transparency and a commitment to rectifying errors promptly. It fosters a sense of trust and reliability. Credit notes may hold unique significance in local or street-level business practices.&nbsp;

In certain regions, credit notes might be a customary way of acknowledging and settling disputes or compensating clients for minor inconveniences.

Debit Notes: The Additional Charge Advocates

Debit notes are official documents that request buyers to settle extra amounts owed to sellers beyond the original agreement. IT service providers issue debit notes in various scenarios, such as scope expansions, price adjustments, and reimbursable expenses.

Proper accounting measures for debit notes include detailed documentation of reasons for issuing the debit note, timely communication with the client, invoice reconciliation for transparency, and adherence to <a href="https://www.skydo.com/blog/understanding-gstin-requirements-for-export-businesses-in-india?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">GST compliance</a> if applicable.

GST Certificate and LUT Registration: Enabling Compliance and Input Tax Credit in India&nbsp;

Under the GST regime, the GST Certificate and <a href="https://www.skydo.com/blog/everything-you-need-to-know-about-lut?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Letter of Undertaking or LUT</a> Registration play crucial roles in this system. The GST Certificate is issued upon successful GST registration, confirming an entity's eligibility to collect GST from customers and claim <a href="https://www.skydo.com/blog/how-to-claim-input-tax-credit-refund-in-india?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Input Tax Credit (ITC)</a> on eligible purchases.&nbsp;

Accurate document usage is paramount in claiming ITC, as any discrepancies may lead to rejections or potential penalties.

For businesses engaged in exports, the LUT is indispensable. It allows exporters to supply goods or services without paying GST upfront and is valid for a specified period. By avoiding upfront tax payments, businesses can improve cash flow and competitiveness in the global market.

Understanding its importance and compliance requirements is crucial for businesses to optimise GST benefits and thrive in the Indian marketplace.

Using Accounting Software: Simplifying Document Management

From invoices and purchase orders to credit and debit notes, accounting software automates it all, saving time and reducing errors. <a href="https://www.skydo.com/blog/skydo-dashboard-for-all-your-needs?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Centralising data</a> ensures seamless document retrieval and secure storage, promoting efficient record-keeping.

When selecting accounting software, consider features like customisable templates for invoices and purchase orders, real-time data syncing, and automated reminders for due payments. Advanced software can integrate with tax systems, simplifying GST compliance by automatically calculating taxes and generating accurate reports.

By utilising reliable accounting software, businesses can streamline document management, maintain regulatory compliance, and gain a competitive edge in today's fast-paced financial landscape.

Navigating the Accounting Landscape with Confidence

In financial management, understanding the significance of different accounting documents is the compass that guides IT service providers towards success.

By grasping the roles of these documents, IT service providers can maintain healthy client relationships, ensure accurate financial reporting, and optimise tax benefits. Utilising accounting software further simplifies document management, promoting efficiency and compliance.

Q1. What are source documents in accounting?

Ans: Source documents in accounting are the original records that provide evidence of a transaction. These documents are the foundation for accounting entries and include invoices, receipts, bank statements, and contracts.

Q2. What are the 5 source documents in accounting?

Ans: The five main source documents in accounting are invoices, receipts, checks, purchase orders, and credit memos. These documents substantiate financial transactions and are crucial for accurate record-keeping.

Q3. What are business documents in accounting?

Ans: Business documents in accounting encompass a wide range of records, including source documents and internal documents like financial statements, ledgers, and journals. They collectively form the documentation trail that supports the business’ economic activities and decisions.

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Here’s a list of checkpoints before choosing the right bank for your IT service export company. The first step before considering any banking factors is knowing your business requirements.

Evaluate your finances, lay out your growth strategies, examine market trends, and consult professionals. The right bank can accelerate your company's growth with customised solutions and long-lasting support.

With the roster of needs required to expand your business globally with the right bank, here’s a checklist to help you choose the right financial institution.

Checklist to Choose the Right Bank: Your Guide to the Right Move

1. Diversity of Services: Looking Beyond Basic Banking&nbsp;

Select a bank that can understand your unique requirements and provide specialised solutions to support your company's growth. The bank that goes above and beyond basic services like credit and lending options, merchant services, cash management, and investment solutions is an absolute winner.&nbsp;

The bank should cater to your industry, and business size - whether it's business-specific loans or industry-specific financial advice. They might be your doorway to more funding, pivotal allies, and vital crisis-avoidance counsel.&nbsp;

2. Global Payment Capabilities: Catering to a Borderless Business World

As a <a href="https://www.skydo.com/blog/seamlessly-accept-international-payments-in-india?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">tech export company</a> that deals with international clients, your bank must provide cross-border payment services and support multiple currencies. Remember to include the fees and currency rates for overseas transactions; they should be fair so they do not eat into your profits.

3. Customer Service: Your Ally in the Banking World

When running a small business, you can't afford to waste time on bad customer service. You need a bank that will always be there for you when you need them. Make sure they have accessible support channels and responsive account managers who are dedicated to their business clients.&nbsp;

Consider the amount of assistance you require now and as the company evolves. Certain banks provide specialised consultants to help you manage your accounts, expand your business, and deal with tax or payroll issues.&nbsp;

4. Innovative Solutions: Embracing the Digital Revolution

How frequently do you rely on technology for your banking? Do they offer integrations with your current accounting software or other business tools? Find a bank that stays ahead of the curve with the latest tech and platforms tailored to meet your unique needs.&nbsp;

Take a closer look at their technological capabilities and digital offerings. A modern bank should offer easy-to-use, secure online and mobile banking services.

Thoroughly understand the fee structure of the bank before partnering with them. Enquire about account maintenance fees, transaction fees, wire transfer fees, and other expenses related to their services.&nbsp;

Do your due diligence and consider any potential fees, including the following.

Banking for the Future: Staying Ahead of the Game

The future of business banking is transforming rapidly with technological advancements and evolving expectations of customers.&nbsp;

To stay ahead, embrace these trends and prepare for the future.

Look beyond basic banking services, understand their global payment capabilities, customer service, and how innovative and transparent they are with their banking solutions.

Don't hesitate to reach out to bank representatives directly to discuss how they can cater to your business's demands. Seek advice from financial experts or fellow business owners for valuable insights into the best banking options tailored for your enterprise. Remember, choosing the right bank is more than just a business decision – a partnership that profoundly impacts your long-term success.

The Skydo Advantage: Making Your Global Payments Journey Smooth

Payment solution providers like Skydo are emerging as powerful complements to traditional banking services.

<a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a> is the ultimate bridge between businesses and banks, bringing flexibility, cost-effectiveness, and convenience to international payments. As your trusted ally in business growth, we streamline cross-border transactions and make international payments hassle-free.&nbsp;

We offer tailored solutions that perfectly align with your business needs. Whether you need to pay international suppliers, freelancers, or employees, we ensure secure and cost-effective transfers.

With our user-friendly platform, you can effortlessly navigate the entire payment process. Say goodbye to hidden fees and uncertain exchange rates. Our transparent pricing puts you in full control of your funds.&nbsp;

We support multiple currencies and local banking networks for agile transactions, reducing processing times and eliminating unnecessary delays. Take the leap with <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a> and stay ahead in the game of global payments.

Business banking requires a strategic approach to selecting the right bank for a company's success. Factors to consider include high working capital requirements, trade finance, cash management solutions, strong employee value propositions, and innovative technology for payments and workflow management.&nbsp;

To choose the right bank, focus on the diversity of services, global payment capabilities, and customer service. You must embrace innovative solutions, such as mobile banking apps, online payments, and automated financial management tools while being transparent about your costs.&nbsp;

By choosing the right bank, businesses can strategically make informed decisions and stay ahead in the global payments market.

Q1. What are some of the things you should look for when selecting the right bank?

Ans: When selecting the right bank, consider factors such as fees, interest rates, account types, online services, and customer reviews. Assess your financial needs, evaluate transparency in terms and conditions, and ensure convenient ATM access.

Ans: The best bank for you depends on your needs. Evaluate factors like account fees, interest rates, online services, and branch accessibility. Research customer reviews to gauge overall satisfaction.

Q3. What are the most important features you want to consider when shopping for a bank?

Ans: Essential features when shopping for a bank include low fees, competitive interest rates, diverse account options, user-friendly online banking, and responsive customer service. Assessing ATM availability and mobile app functionality is crucial.

Ans: A good bank offers low fees, competitive interest rates, a variety of accounts, convenient online services, and excellent customer service. It should align with your financial goals, providing reliable and transparent banking solutions.

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One of the main challenges businesses face when exporting services globally is navigating international payments. Different countries have different export payment terms, payment systems, currencies, and regulations, making it difficult for businesses to know which payment method to use, how to negotiate payment terms and manage exchange rate risk.

Understanding payment terms in export is essential for businesses that export services globally. Here are ten important international payment terminologies for global export business:

<a href="https://www.skydo.com/blog/get-the-most-out-of-your-forex-savings-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Forex, or foreign exchange</a>, refers to the global marketplace for trading national currencies against one another. It plays a pivotal role in international trade by facilitating the conversion of currencies and enabling businesses to engage in <a href="https://www.skydo.com/blog/future-of-cross-border-payments-2030-and-beyond?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cross-border transactions</a>.&nbsp;

Understanding the Forex market is crucial for businesses as it allows them to manage currency risks, hedge against exchange rate fluctuations, and <a href="https://www.skydo.com/blog/price-it-right-driving-success-in-your-it-services-company?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">optimize pricing strategies</a>.&nbsp;

A nuanced comprehension of Forex dynamics allows businesses to strategically hedge against currency volatility, ensuring stable profit margins and fostering competitive advantages in the ever-evolving landscape of international trade. In essence, mastery of Forex enhances financial resilience, fostering a more agile and adaptive approach to global business.

Exchange rates represent the value of one currency in terms of another, determining the cost of international transactions. Fluctuations in exchange rates significantly impact your international payments, affecting the amount you receive or pay.&nbsp;

Influencing factors of exchange rate fluctuations include–

Monitoring these factors is crucial for individuals and businesses engaged in cross-border transactions, as understanding exchange rate dynamics helps mitigate risks and optimize financial decisions, ensuring your international payment methods align with prevailing market conditions.

A <a href="https://www.skydo.com/blog/benefits-of-multi-currency-accounts?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">multi-currency account</a> is a versatile financial ally in international payment methods that empowers you to hold and manage funds in various currencies within a single account. With this account, you can seamlessly transact and keep money in different currencies, offering flexibility and convenience in international dealings.&nbsp;

Its features include real-time currency exchange, enabling you to switch between currencies at competitive rates. In addition, having a multi-currency account can reduce fees when conducting transactions in foreign currencies.&nbsp;

#4: International Bank Account Number (IBAN)

The International Bank Account Number (IBAN) is a globally recognised identifier for bank accounts. In your international transactions, IBANs play a crucial role in simplifying and securing cross-border payments. They ensure accuracy by providing a standardised format, reducing errors in manual data entry.&nbsp;

With IBANs, transactions become more efficient, as they contain essential information like the country code and account number. This streamlines the process and enhances security by preventing misrouting of funds.&nbsp;

Let’s take an example of an IBAN for a hypothetical bank in the US.&nbsp;

The IBAN would be GB29NWBK60161331926819.

"GB" represents the country code (United Kingdom).

#5: Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Entrusting your global financial transactions to the <a href="https://www.skydo.com/blog/why-was-a-certain-amount-deducted-from-my-swift-payments?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Society for Worldwide Interbank Financial Telecommunication (SWIFT)</a> is a strategic move in international finance.&nbsp;

SWIFT operates as a member-owned cooperative, providing a secure messaging network that facilitates seamless money transfers between participating banks. Its role in international transactions is pivotal, acting as the linchpin for secure communication among financial institutions worldwide.

Central to the efficacy of SWIFT is the utilisation of unique codes, commonly known as SWIFT codes or bank identifier codes (BIC). These codes, typically eight or 11 characters long, play a crucial role in ensuring the security and efficiency of payments.&nbsp;

For instance, the Italian bank UniCredit Banca boasts the SWIFT code UNCRITMM, where each segment holds specific information about the institution, its country, and its location.

SWIFT codes serve as digital fingerprints, guaranteeing that funds reach their intended destination with precision. The meticulous encoding of sender and recipient information within these codes expedites transactions and fortifies the financial ecosystem against potential security threats.&nbsp;

In essence, SWIFT and its codes are guardians of the global financial landscape, enabling you to navigate cross-border transactions with confidence and reliability.

A <a href="https://www.investopedia.com/terms/l/letterofcredit.asp">Letter of Credit (LC)</a> serves as a financial lifeline, defining a predetermined line of credit for international transactions. This crucial instrument assures payment, mitigating risks inherent in cross-border deals. Acting as a contractual guarantee, LCs boost trust between you and clients by ensuring funds are set aside for payment upon service delivery.&nbsp;

This secure payment method establishes a framework for seamless transactions, fostering a reliable and transparent relationship with partners worldwide. As the backbone of your payment system, LCs not only define financial parameters but also fortify the foundation of trust in the dynamic landscape of global IT services.

Embracing <a href="https://www.sebi.gov.in/legal/circulars/apr-2023/bank-guarantees-bgs-created-out-of-clients-funds_70518.html">bank guarantees (BGs)</a> for payment acceptance is pivotal in your global IT service business. BGs serve as a financial safety net, ensuring secure transactions on an international scale.&nbsp;

Functioning as a commitment from a bank that payment will be made in the event of a default, BGs offer reassurance to both parties involved. For your business, this means guaranteed payment upon successful service delivery, fostering trust and mitigating risks associated with cross-border transactions.&nbsp;

Advance payments in international trade refer to funds transferred by the buyer to the seller before the goods or services are delivered. This prepayment is a common method to secure a transaction, providing the seller with financial assurance.&nbsp;

One advantage for businesses using advance payments is immediate cash flow, aiding in production or procurement. However, the buyer faces the risk of non-delivery or dissatisfaction, making due diligence crucial.

Documentary collection, an alternative, involves a bank facilitating the exchange of documents for payment. Its purpose is to reduce payment risks while offering flexibility. Unlike letters of credit, documentary collection does not provide the same level of security, but it is less costly and complex.

While advance payments offer quick liquidity, they may strain buyer-seller relationships due to trust concerns. The documentary collection strikes a balance between security and simplicity.&nbsp;

Understanding these methods is vital for businesses engaged in global transactions, allowing them to choose the most suitable payment mechanism based on their specific needs and risk tolerance.

Selecting appropriate payment terms is crucial for international trade. Understand the common options to make informed decisions tailored to your business needs. Among the widely used terms is Letter of Credit (L/C), where a bank guarantees payment upon compliance with agreed-upon conditions.&nbsp;

Advance Payment demands payment before shipment, providing security but potentially affecting buyer trust. Open Account involves trust between parties, with the seller shipping goods before payment. To strike a balance, consider Cash in Advance for security or Open Account for established relationships.

For your business, assess factors such as cash flow, risk tolerance, and relationship history with your global clients. Balance the buyer's need for credit against your desire for payment security.&nbsp;

Building a comprehensive understanding of terms of payment in export ensures smoother transactions, reduces financial risks, and fosters stronger international business relationships. Tailor your approach, considering the unique dynamics of your industry and partners, to make informed decisions that align with your business objectives.

Currency risk in <a href="https://www.skydo.com/blog/simplify-your-global-payments-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">global transactions</a> refers to the potential financial loss due to fluctuating exchange rates. When conducting international business, changes in currency values can impact profits and expenses.&nbsp;

To shield your business, employ strategic currency risk management. Hedge against volatility using financial instruments like forward contracts or options, fixing exchange rates in advance. Diversify currency holdings to spread risk, minimising the impact of adverse movements.&nbsp;

Stay informed about geopolitical events and economic indicators influencing currency markets. By adopting these strategies, you'll fortify your business against currency risk, ensuring stability in an unpredictable global financial landscape.

Bonus: Other Important International Payment Terminologies

Comprehending international payment terminologies is paramount for businesses venturing into global service exports. Mastery of payment regulations language ensures avoidance of legal and financial pitfalls, fostering a seamless cross-border transaction experience.&nbsp;

Staying abreast of evolving global payment trends is indispensable for maintaining a competitive edge. By navigating the intricate landscape of international payments, businesses position themselves to capitalize on opportunities and mitigate risks. A nuanced understanding of these terminologies not only safeguards against pitfalls but also establishes a foundation for successful and compliant global business operations.

Q1. What are the methods of payment in international trade?

Ans: International trade commonly involves payment methods such as letters of credit, bank transfers, and open account transactions. These methods ensure secure and efficient cross-border transactions.

Q2. What are the common methods of foreign payments?

Ans: Common methods of international payment include letters of credit, bank transfers, and open account transactions. These foreign payment methods facilitate smooth and secure financial transactions between parties engaged in global trade.

Ans: Documentary credit or letter of credit is a financial arrangement widely used in international trade, issued by a bank to guarantee payment to the seller upon the fulfilment of specified conditions.

Ans: Documentary collection is a method of payment in international trade where a seller entrusts the handling of shipping documents to banks, with the buyer making payment upon document presentation as per agreed terms.

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An RBI purpose code is a standardised, alphanumeric label that classifies the reason for a foreign inward remittance (e.g., P1401 salary, P0102 export realisation, P0802 software services). AD banks must capture and report it to the RBI for every incoming transfer under FEMA reporting.

Why the right RBI purpose code is critical (inward remittance)

Picking the correct RBI purpose code for inward remittance isn’t a formality; it directly affects compliance, speed of credit, and your documentation trail.

1) It’s a regulatory must-have (FEMA/RBI).
Authorised Dealer (AD) banks must capture and report every foreign inward transaction to RBI with a valid receipt (“P”) purpose code under FETERS. If the code is missing/wrong, banks can’t file accurate returns, triggering holds or rework.&nbsp;

2) It keeps your paperwork clean (FIRC/evidence).
The purpose you declare flows into your compliance evidence (e.g., FIRC details and audit trails). Declaring the accurate code up front helps your bank issue the right certificate without back-and-forth.&nbsp;

3) It prevents delays, manual reviews, and returns.
A vague or incorrect purpose (e.g., tagging a service payment as goods realisation) often triggers manual checks, queries, or even a return to sender until corrected.&nbsp;

4) It improves accounting clarity and BoP classification.
Purpose codes classify inflows (e.g., P01 goods exports, P08 computer &amp; information services, P10 other business services, P13 transfers, P14 income), allowing clean bookkeeping and accurate national statistics—another reason banks insist on precise coding.

5) It reduces compliance risk later.
If you repeatedly misclassify remittances, you create inconsistencies between invoices/contracts and RBI filings—raising the odds of additional questions or penalties under FEMA. Industry guidance stresses getting the code right at the remitter setup stage (sender’s bank/platform usually captures it) to avoid re-papering.&nbsp;

How to pick the correct code (step-by-step)

Find the right purpose code for inward remittance with Skydo

Our purpose code finder is your shortcut to identifying the correct purpose code for inward remittance and explaining when to use it. You can either search for the activity to find the relevant purpose code or directly look up the specific purpose code for a simple explanation of when to use it.&nbsp;

Please note that this tool doesn't contain the exhaustive purpose code list for inward remittance.&nbsp; For complete compliance and accuracy, it's always advisable to get in touch with your financial advisor for professional advice.

Personal vs. Business: Quick Selector for the Right Purpose Code

Personal / family inflows (individuals):