Some more problems are in store for PayPal users in India. The RBI, earlier this year, had directed PayPal to not accept any transactions that exceeded $500 in value. PayPal communicated the same to all its users in India but never really enforced that rule and thus, PayPal account holders could continue to receive payments exceeding that limit without any issues.

The “grace” period is however over.

PayPal, in order to strictly comply the RBI guidelines, will now decline (auto-reverse) all transactions in future that exceed $500 in value. The more troubling part is that they’ll also reverse all the previous payments you may have received in your account in or after March 2011 that exceeded the said amount.

This puts everything in a mess and let me explain that with one quick example. Say Mr X sent you a payment of $1000 in August. The transaction was successful and, to comply with another RBI guideline, you immediately transferred that money to your local bank account in India. Your effective PayPal balance was $0.

In October, PayPal suddenly decides to reverse that transaction and returns all the money to the sender X. As a result, the client got all his money back, the money you transferred earlier from PayPal is still in your local bank account but now you also have a negative PayPal balance at -$1000.

I asked a PayPal representative how they plan to charge users to clear the negative balance and she suggested that any payments received in the future in your account maybe used for that purpose. PayPal, at this time, doesn’t plan to charge your credit card or your bank for resolving the negative balance.

Meanwhile, you still need to figure out an alternate way to receive the money from your client that PayPal returned him earlier this month. Wire transfer or the printed cheque sent via snail mail are the only possible solutions.

Update: PayPal had sent me a list of all $500+ payments that I received in or after March this year. Their customer support team confirmed over the phone that these transactions would be reversed but at the time of writing, only one payment received in September has been returned to the sender.

Update: PayPal India just issued an update saying that the receiving limit has been raised from $500 to $3000 for export-related transaction.

PayPal has been notified by the Reserve Bank of India (RBI) that effective immediately PayPal merchants in India can receive export-related payments for goods and services into their PayPal account up to USD 3000 per transaction (raised from USD 500 per transaction). This is a huge step forward for PayPal and for Indian SMEs who can grow their export business through e-commerce by tapping PayPal’s 100 million active users in 190 markets across the globe right from the U.S. to the U.K. to Australia.

I am not sure if this also applies to freelancers or PayPal users who accept payments in lieu of services and not exports.

Update: PayPal India has confirmed that the new $3000 limit is valid to all transactions and not just export related payments. They sent me this note via email:

Today’s announcement of increase in transaction limit to US$3000 applies to any user in India with a PayPal account as long as it’s export-related payments for goods and services. For example if an Indian freelancer contributes articles to a foreign publishing house, they can use their PayPal account to receive payment from overseas.

That’s some good news finally coming from the PayPal side.