If you are based in India and have been using the PayPal service to receive payment from foreign clients and advertisers, here’s some disheartening news for you.

Starting March 1st, you’ll not be allowed to receive payments that exceed $500 per transaction. Also, you won’t be able to keep any money in your online PayPal account – all money received into PayPal must be transferred to your Indian bank account within 7 days.

There’s another major restriction in place. You’ll not be able to buy goods using the money that’s in your PayPal account. If you have to make payments via PayPal to someone, the money should first be transferred to PayPal using your bank’s credit card.

PayPal has taken all these steps to comply with the RBI guidelines so we can’t really blame them but this is real bad news for their customers in India.

PayPal operations in India have been under scrutiny for more than a year and we now know who had the last word. You can read the detailed announcement on PayPal.com.

Why RBI may have clipped the wings of PayPal

Let’s say you are freelancer in India and your client in U.S. paid you $100 via PayPal for your services. The money gets deposited in your online PayPal account.

You can use that money in three different ways – you can either transfer it to your local bank account in India (via paper cheque or wire transfer), or you can do some online shopping with that money or simply let it accumulate in your PayPal account.

The money coming to you via PayPal is often taxable in India and unless you self-declare it or transfer it to the bank, the India tax authorities won’t have a clue about it.

There is a possibility that a good number of PayPal users in India weren’t reporting PayPal earnings in their tax returns and that may have prompted the Government /RBI to enforce this rule that money should be transferred here as soon as it comes to your PayPal account.

PayPal works more or less like an online bank – you can deposit money, you can withdraw money and you can make payments. RBI closely monitors the operations of banks here but in the case of PayPal, they had no such freedom. That could have been another reason for the ‘shut down.’