what is late presentation in letter of credit

Field 48 (‘Period for presentation in days’) in Letter of Credit (L/C)

F48 is an optional field in MT700 swift message of Documentary letter of credit.

F48 (Period of Presentation) field defines the period of time in calendar days by which the presentation of documents should be made in the negotiating bank. The beneficiary will do the presentation/negotiation to get the payment.

From the F44C(Latest Date of Shipment) , the countdown will start. Normally the period is up to the LC expiry date mentioned in F31D(Date and Place of Expiry).

The date can be mentioned 7,10,14,21 any days as agreed between buyer and seller but not later than the LC expiry date.

If the field is not mentioned in the documentary credit then a default of 21 days is considered. But must not exceed the expiry date as I told you earlier.

Within this presentation period, the beneficiary submits negotiable documents mentioned in 46A(Documents Required)   to the presenting bank as per instruction in F41D or F41A(Available With..By…)

As a common practice, LC  validity is kept 90days (one quarter) to maintain the same charge. In that case, the latest date of shipment is mentioned as 69 days. The presentation period is 21 days if there’s no specific requirement from the buyer or seller.

The presentation can be both Electronic records or paper documents.

Do you have any thoughts about this? let me know in the comments.

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3 thoughts on “ field 48 (‘period for presentation in days’) in letter of credit (l/c) ”.

Is it possible for a period of presentation in an L/C to exceed 21 days? Let’s say 60 days from bill of lading date but within the LC validity.

Can F48 be 31, after bill of lading date? Thanks.

Hi Eddie, F48 is an optional field that comes after F71D (charges) as per SWIFT format. can you share more about your inquiry?

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Mr. Old Man For those who eat, sleep and breathe Letters of Credit & Cycling

Late presentation and lc expired.

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Shahed – Canada Posted 15 Jun 11 |

L/C shows under field 48 " Period for Presentation" reads : DOCUMENTS MUST BE PRESENTED AT PLACE OF EXPIRATION WITHIN (15 ) DAYS OF ISSUE DATE OF TRANSPORT DOCUMENTS AND WITHIN THE L/C VALIDITY ".

UCP 600 Art 14 C reads : A PRESENTATION INCLUDING ONE OR MORE ORIGINAL TRANSPORT DOCUMENTS SUBJECT TO ARTICLES 19,20,21,22,23,24 OR 25 MUST BE MADE BY OR ON BEHALF OF THE BENEFICIARY NOT LATER THAN 21 CALENDAR DAYS AFTER THE DATE OF SHIPMENT AS DESCRIBED IN THESE RULES, BUT IN ANY EVENT NOT LATER THAN THE EXPIRY DATE OF THE CREDIT.

Some people's interpretation to the clause for presentation period is that both conditions must be fulfilled, i.e. docts must be presented within 15 days AND also must be within L/C expiry otherwise even though the docts are presented within 15 days but after expiry date, late presentation exists.

I think late presentation and L/C expiry are 2 different issues. If docts are presented to the nominated bank after expiry but within 15 days after shipment date, The discrepancy is only L/C expired, not late presentation. e.g. L/C expiry date is April 1 . Period for presentation is 15 days after shipment date. B/L showing shipment date as March 20 and docts presented to the nominated bank's counter is April 3. In this case, there is only one discrepancy that is L/C expired (there is no late presentation).

Do you agree ?

Shahed Toronto —————– JimBarnes – United States Posted 15 Jun 11 |

I agree that late presentation and credit expiry are two different defenses under UCP and that LC specialists generally understand that and use the terms accordingly. But non-LC specialists do, expectably based on a plain English reading of the term, assume/conclude that late presentation covers presentation after credit expiry.

Regards, Jim —————– JSMITH – United Kingdom Posted 16 Jun 11 |

I think it is utterly misleading to use the term ‘Late presentation’ to mean solely that documents have not been presented within the required post-shipment presentation period and I am therefore 100% against it. To me presentation after expiry is equally ‘late presentation’. So as to be clear and precise, the relevant discrepancies should be described as ‘Documents not presented within X days of shipment’ or similar and ‘Documents presented after expiry’ or similar. —————– Duc N.H – Viet Nam Posted 16 Jun 11 |

I would cite “late presentation” when the documents are not presented within the stipulated period for presentation, and “LC expired” or “documents presented after the LC expiry” when the documents are presented after the LC expiry. However, I agree that “late presentation” can be used to mean the documents being presented after the LC expiry.

Regards, Duc N.H —————– GSHAM – Singapore Posted 16 Jun 11 |

In Hong Kong, then Singapore, where I have worked in various trade banks, 'late presentation' is used to describe presentation beyond the period allowed in field 48, 'LC expired' is used to describe presentation made after the expiry date. For clarity, since a bank is given only one chance to send a notice of refusal, it is a good practice to be more detailed in order to avoid confusion or dispute. Therefore it is a good practice to state them respectively as "documents not presented within x days" and "documents presented after expiry".

Regards Gabriel —————– DLLOYD1 – Switzerland Posted 16 Jun 11 |

Let's face it, if you have "LC expired", you're off the hook. Whatever else you may raise, this is a complete STOP discrepancy.

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TRỞ LAI RÚ CẤM NAM Ô VỚI HUYỀN SỬ VỀ HUYỀN TRÂN CÔNG CHÚA

Ngân hàng có phải kiểm tra tư cách pháp lý của người ký chứng từ, where two sets of documents are presented under one covering letter (3), consignee on documents other than certificate of origin (updated with isbp 821), đường tranh bích họa yên khê, đừng vội vàng chia sẻ những tin tức “pha ke”.

December 11, 2013 at 3:12 am

IS THE BANK OBLIGED TO REPLY TO THE NEGOTIATING BANK REGARDING THE EXAMINATION OF DOCUMENTS, THE L/C IS EXPIRED AND NO OBLIGATION ON THE ISSUING BANKYOUR COMMENTS ON THIS MATTER IS WELCOMED

mroldmanvcb

December 11, 2013 at 2:12 pm

In all cases it is advisable for the issuing bank to reject the documents and advise the same to negotiating bank in accordance with sub-article 16 (c).

February 11, 2014 at 5:44 pm

Chao anh Duc,

Nho anh giai thich dum em diem nay: Viec xuat trinh chung tu theo UCP duoc hieu la viec chuyen giao chung tu thuoc mot tin dung thu cho NH phat hanh hoac cho NH chi dinh. Ben em co 1 L/C nhu sau: F31D: 140130 in Taiwan F44C: 140125 F48: 15 days Neu viec xuat trinh duoc thuc hien dung vao ngay 30 jan 2014 thi ngay het han thuc su cua L/C nay tai issuing bank duoc tinh nhu sau phai khong anh: 30 jan 2014 + 15 days + 5 working days for negotiating bank Kinh nho anh tu van giup, cam on anh nhieu!

February 11, 2014 at 8:23 pm

Theo mô tả của bạn tại F31D thì thời hạn và nơi chấm dứt hiệu lực LC (thời hạn xuất trình) là tại NHPH ở Taiwan. Thời hạn này được khống chế tại F48, theo đó chứng từ phải được xuất trình trong vòng 15 ngày kể từ ngày giao hàng nhưng phải trong thời hạn hiệu lực nêu tai F31D.

Giả định chứng từ xuất trình đến NHPH trong thời hạn xuất trình quy định (15 ngày) và rơi đúng vào ngày chấm dứt hiệu lực quy định tại F31D, tức là 30/1, thì đó là ngày cuối cùng mà chứng từ được phép xuất trình.

Cách tính như bạn là không đúng. Xin lưu ý lại rằng thời hạn 15 ngày quy định tại F48 được hiểu là 15 ngày kể từ ngày giao hàng nhưng trong thời hạn hiệu lực LC nêu tại F31D

Kind regards, Mr. Old Man

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LC Document Discrepancies– Know What It Is & How To Deal With It

The discrepancy in LC can be explained as an error or defect. Error or defect that has been figured out at the time of checking documents in Letter of Credit documents are explained as discrepancies in Letter of Credit documents. So, if the conditions are not met in the documents are do not comply with the LC clause they can be explained as discrepancies in LC documents. Banks do deduct a certain amount if discrepant documents are observed around.

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Following are the major LC Discrepancies that are found in LC documents.

1. Late Shipment

If the goods are shipped after the shipment date which is mentioned in LC, it will be considered discrepant. So, be it a bill of lading or as per delivery challan – they will be late shipment if the date exceeds the mentioned date.

2. Late Presentation

If the documents are not presented within the prescribed time as mentioned in the LC clause by the beneficiary to the beneficiary bank, then the document can be discrepant. Generally, 21 days of presentation time is given for document presentation.

3. LC Expired

If the beneficiary’s bank receives the document after the LC expiry date, that will be a discrepancy as well. Normally banks don’t accept such documents, but if the applicant is okay with the expired date – that won’t be an issue. The expiry date of LC is considered taking into consideration the beneficiary banks covering.

4. Absence of Documents

If any documents are missing concerning the LC clause, that can be termed discrepancy. For example, if the Insurance document is mentioned in the LC clause, but is absent in the document list – it can be termed discrepant. Even if the beneficiary submits two originals instead of asked three originals, it can be explained discrepant document.

5. Incomplete Bill of Lading

As explained in UCP 600, the bill of lading must indicate the name of the carrier and should be signed by either the carrier or named agent on behalf of the carrier or the master or the named agent on behalf of the master. If banks don’t face the carrier’s name on the face of BL, they can term it as discrepant.

6. Incorrect Details about Goods or Services

The details about goods in Commercial Invoice should be liable to the LC clause, or the proforma invoice. There can be a nominal downfall over the price, or quantity but the unit price should be the same. Even minor spelling errors on the name of goods can result in discrepancies.

7. Endorsement

Generally, Bill of Exchange or Transport documents should be endorsed in the name of LC Issuing Bank. If the insurance clause is not demanding direct in favor of the LC issuing bank, the insurance documents should be endorsed too – else the issuing bank has the right to quote discrepancy for these set of documents.

8. Dates in Documents

Insurance should be done before the shipment date, else that can be termed discrepancies. Any other documents that have been asked should not be before the LC opening date, else that would be part of discrepancies as well. Dates will be carefully examined by LC issuing bank.

9. Non Compliance to LC Clause

If LC clauses and documents presented contradict, they can be part of discrepancies as well. For example: if it has been mentioned that all documents should bear LC Number, LC Date, and Harmonic Code – it means all the documents that have been asked for should have them. Else, they will be part of the discrepancy.

Dealing with Discrepant Documents

LC issuing banks, who receive the documents, should inform the beneficiary banks within five days about the discrepancy of the documents that are being found through SWIFT message. They have this right to quote discrepancy before information to the applicant as well. Once informed, banks will convey the applicant about the discrepancy documents and if applicants are willing to accept the discrepancies – they can go for the release of documents.

It has to be understood that discrepant documents do not lead to cancellation of LC, applicant will have the right to reject the documents if they are not ready to accept the discrepancies and return the documents without making any payment thereby.

(Mr. Dwaipayan Regmi is a banker.)

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One thought on “ LC Document Discrepancies– Know What It Is & How To Deal With It ”

We are in a case where supplier has sent us the discrepant document. Shipper is forcing us to accept the shipment, while we do not want to. Discrepancies are as follows.

1. Insurance certificate showing excess deductible clause, and not showing insurance company’s agent in destination country 2. Vessel certificate required under 46-A not presented.

We can return the document, but the shipper can clear the discrepancies and submit the documents.

Presentation period under the LC was 21 days from shipment date. Although shipper submitted the documents under the presentation period, but it was not complying presentation due to discrepancies. 21 days has already passed now. If the shipper resubmits the document now, would there be another discrepancy for late submission? and is the buyer anyway liable to accept the shipment?

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What Is a Letter of Credit?

How a letter of credit works, types of letters of credit, example of a letter of credit.

• Applying for a Letter of Credit
• Advantages and Disadvantages
• Letter of Credit FAQs

The Bottom Line

• Personal Finance

Letter of Credit: What It Is, Examples, and How One Is Used

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade to protect buyers and sellers.

Key Takeaways

• A letter of credit is a document sent from a bank or financial institution that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
• Letters of credit are often used within the international trade industry.
• There are many different letters of credit, including one called a revolving letter of credit.
• Banks collect a fee for issuing a letter of credit.

Jessica Olah / Investopedia

Buyers of major purchases may need a letter of credit to assure the seller that the payment will be made. A bank issues a letter of credit to guarantee the payment to the seller, essentially assuming the responsibility of ensuring the seller is paid. A buyer must prove to the bank that they have enough assets or a sufficient line of credit to pay before the bank will guarantee the payment to the seller.

Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.

Because a letter of credit is typically a negotiable instrument , the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable , the beneficiary may assign another entity , such as a corporate parent or a third party, the right to draw.

The International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

How Much a Letter of Credit Costs

Banks usually charge a fee for a letter of credit, which can be a percentage of the total credit they are backing. The cost of a letter of credit will vary by bank and the size of the letter of credit. For example, the bank may charge 0.75% of the amount that it's guaranteeing.

Fees can also depend on the type of letter. In an import-export situation, an unconfirmed letter of credit is less costly. A confirmed letter of credit may have higher fees attached based on the issuing bank's credit strength.

The types of letters of credit include a commercial letter of credit, a revolving letter of credit, a traveler’s letter of credit, a confirmed letter of credit, and a standby letter of credit. International trade will also sometimes use an unsecured— red clause —letter of credit.

Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain limit during a specific period. It can be useful if there are frequent merchandise shipments, for example, and you don't want to redraft or edit letters of credit each time.

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts made at certain foreign banks.

Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default . The issuing bank in international transactions typically requests this arrangement.

Standby Letter of Credit

A standby letter of credit provides payment if something does not occur, which is the opposite of how other types of letters of credit are structured. So, instead of facilitating a transaction with funding, a standby letter of credit is like an insurance contract. It protects and compensates one party (the beneficiary) if the other party named in the agreement fails to perform the stated duty or meets certain service level agreements outlined in the letter of credit.

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia, and the Middle East, who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

How to Apply for a Letter of Credit

Letters of Credit are best prepared by trained professionals, as mistakes in the detailed documents required can lead to payment delays and fees. Due to industry variations and types of letters of credit, each may be approached differently.

Here's an import-export example.

• The importer's bank credit must satisfy the exporter and their bank. The exporter and importer complete a sales agreement.
• Using the sales agreement's terms and conditions, the importer's bank drafts the letter of credit; this letter is sent to the exporter's bank. The exporter's bank reviews the letter of credit and sends it to the exporter after approval.
• The exporter ships the goods as the letter of credit describes. Any required documentation is submitted to the exporter's bank.
• The exporter's bank reviews documentation to ensure letter of credit terms and conditions were met. If approved, the exporter's bank submits documents to the importer's bank.
• The importer's bank sends payment to the exporter's bank. The importer can now claim the goods sent.

Advantages and Disadvantages of a Letter of Credit

Obtaining letters of credit may be necessary in certain situations. However, like anything else related to banking, trade, and business, there are some pros and cons to acknowledge.

Can create security and build mutual trust for buyers and sellers in trade transactions.

Makes it easier to define the specifics of when and how transactions are to be completed between involved parties.

Letters of credit can be personalized with terms that are tailored to the circumstances of each transaction.

Can make the transfer of funds more efficient and streamlined.

Buyers typically bear the costs of obtaining a letter of credit.

Letters of credit may not cover every detail of the transaction, potentially leaving room for error.

Establishing a letter of credit may be tedious or time-consuming for all parties involved.

The terms of a letter of credit may not account for unexpected changes in the political or economic landscape.

How Does a Letter of Credit Work?

Often, in international trade, a letter of credit is used to signify that a payment will be made to the seller on time and in full, as guaranteed by a bank or financial institution. After sending a letter of credit, the bank will charge a fee, typically a percentage of the letter of credit, in addition to requiring collateral from the buyer. Among the various types of letters of credit are a revolving letter of credit, a commercial letter of credit, and a confirmed letter of credit.

What Is an Example of a Letter of Credit?

Consider an exporter in an unstable economic climate, where credit may be more difficult to obtain. A bank could offer a buyer a letter of credit, available within two business days, in which the purchase would be guaranteed by the bank's branch. Because the bank and the exporter have an existing relationship, the bank is knowledgeable of the buyer's creditworthiness , assets, and financial status. 

What Is the Difference Between a Commercial Letter of Credit and a Revolving Letter of Credit?

As one of the most common forms of letters of credit, commercial letters of credit are when the bank makes payment directly to the beneficiary or seller. Revolving letters of credit, by contrast, can be used for multiple payments within a specific time frame. Typically, these are used for businesses that have an ongoing relationship, with the time limit of the arrangement usually spanning one year.

When Does Payment Occur With a Letter of Credit?

A letter of credit is like an escrow account in that payment to the beneficiary only happens when the other party performs a specific act or meets other performance criteria spelled out in the letter of credit agreement.

Letters of credit can play an important part in trade transactions. There are different types of letters of credit that may be used, depending on the circumstances. If you need a letter of credit for a business transaction, your current bank may be the best place to begin your search. However, you may need to expand the net to include larger banks if you maintain accounts at a smaller financial institution.

International Trade Administration. " What Is a Letter of Credit? "

International Chamber of Commerce. “ Global Rules .”

Export-Import Bank of the United States. " To Confirm or Not to Confirm (Letters of Credit) ."

Cornell Law School. " 12 CFR § 208.24 - Letters of credit and acceptances. "

USAID. " Letters of Credit and Trade Finance ," p.106.

FDIC. " Off-Balance Sheet Activities ," p.2

Columbia Bank. " Letters of Credit. "

Citi. “ International Trade .”

Citi. “ Products and Services .”

International Trade Administration. " Letter of Credit. "

International Trade Administration. " Trade Finance Guide ," Page 7.

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Letter of Credit Example: How Money and Documents Move

A letter of credit (LOC) is a promise from a bank to make a payment after verifying that somebody meets certain conditions.

The easiest way to understand how LOCs work is to see an example, and this tutorial describes the process step-by-step. You can also just read an overview  if you prefer a text-only explanation without the visuals.

For this example, we assume that an importer is buying goods from an exporter. However, LOCs are useful in several types of transactions. Standby letters of credit, for example, can work within the U.S. for a variety of services, including building projects, signing up for electrical service, and more. If you want to see how a LOC works for common domestic transactions, replace the terms “importer” and “exporter" with a customer or service provider in your industry. For example:

• The exporter could be an electric utility company that sells power. The importer would be a customer that buys energy from the utility.
• The exporter could be a contractor that promises to complete a project by a specific date. The importer would be the contractor’s customer.

This tutorial illustrates the basic concepts, but a real transaction is much more complicated than what you see here. For now, the idea is just to get comfortable with the flow of documents and payments with LOCs.

Let's Do This!

First, a buyer (importer) and seller (exporter) decide to do business together. They agree on a price, quantity, and other terms, and they specify how and when the goods will be shipped to the buyer. As part of the contract, we assume that the seller requires the buyer to use a letter of credit (LOC).

Why does the seller demand a letter of credit? The seller wants more confidence that the buyer will pay. Perhaps this buyer and seller have never worked together, or the order might be large enough to cause severe financial hardship if something goes wrong. For example, if the seller spends money to produce and ship goods, the seller wants to recoup those costs. The buyer might not pay for several reasons (the buyer’s assets could be seized for some reason, the buyer might go bankrupt, and so on).

The sales agreement is not part of a letter of credit . The sales agreement is between the buyer and the seller only, and the LOC relies on information in the agreement, but the LOC is a separate document issued by a bank.

Issuing the LOC

To obtain the LOC, the buyer contacts her bank. That bank operates in the buyer’s home country, and is most likely a bank that the buyer currently does business with. The buyer provides information required for the bank to issue the LOC, including:

• How much is the payment?
• What is the name and address of the seller (known as the  beneficiary )?
• When will the seller ship goods?
• How will the seller ship the product?
• Where should the shipment arrive?
• And numerous other details

Details matter: It’s essential that the bank gets all of the details correct . The LOC is a legally binding contractual commitment. These documents are interpreted exactly as written. Again, the LOC is separate from the sales agreement, and it’s based on documents—not actions performed—so you can't assume that everything will work out if there’s an error in the LOC. Even a seemingly minor item, like a typographical error, can cause problems. If the document isn’t perfect, it needs to be corrected before anybody moves forward.

Funding: When the bank issues the LOC, the bank makes a promise, and the bank is responsible for sending money. That’s what makes a letter of credit so safe for sellers—the fact that the bank takes responsibility for payment. Because of that, the bank needs to be confident that the buyer can fund the payment . Before the bank issues the LOC, the buyer may have to deposit funds with the bank, or the bank might arrange financing for the buyer as part of the LOC.

Banks and intermediaries: After issuing the LOC, the bank sends it to the seller’s bank. That bank is typically located in the seller’s country and is likely a bank that the seller already has a relationship with. There may be several banks in between acting as intermediaries, but those are left out for simplicity.

Seller review: The seller’s bank reviews the LOC and forwards it to the seller. At that point, the seller must review the LOC to ensure that it matches what she agreed to do and that she is capable of meeting the requirements of the LOC. She should also decide if she is comfortable trusting the issuing bank and any other banks involved.

If everything is acceptable, the seller can move to the next step: produce and ship goods.

Sending Goods and Documents

To receive payment with a LOC, the seller must satisfy the requirements specified in the LOC. Among other things, that usually means:

• Shipping the goods by a certain date
• Possibly having the goods inspected before shipment
• Using the shipping method specified in the LOC
• Shipping to and from ports specified in the LOC
• Gathering documents listed in the LOC (specific shipping documents, for example)
• Submitting documents to the bank by a specific date

Seller confidence: The seller knows that she will get paid   as long as she meets the requirements of the LOC (and assuming the banks involved remain solvent and follow through on their obligations). It doesn’t matter if her customer goes bankrupt or decides not to pay—the bank is on the hook for payment. The end customer’s financial situation is the bank’s problem, not the seller’s problem.

Delivery not required: Depending on the details of the LOC, it doesn’t even matter if the goods ever make it to the customer. A storm may damage or destroy products during shipment, but the seller might not be responsible for that loss if they just had to ship goods.

Documentary requirements: The primary challenge for the seller is meeting the requirements of the LOC. Again, banks only care about the details written into the LOC and the documents you submit to satisfy the LOC. If anything is off, the seller won’t get paid.

For example, if you ship one day late, it’s a major problem. You might throw in some extra product for free (and your customer might even agree that this makes up for the late shipment), but banks won’t pay unless the LOC is amended to account for the later shipping date. It takes extra money and time to revise a LOC.

Payment and Shipment Arrive

Once documents arrive at the seller’s bank, the bank verifies that the documents meet the requirements of the LOC. Again, the bank takes everything literally: If anything doesn't match—even the spelling or abbreviation of a company name—the bank can refuse payment. Banks take several business days to conduct this review.

If the documents are in good order, the seller’s bank forwards the documents to the buyer’s bank. The buyer’s bank performs the same review of documents against the LOC. If everything checks out, the buyer’s bank sends payment to the seller’s bank.

Next, the buyer’s bank forwards the documents to the buyer, who uses those documents to take possession of the goods when they arrive.

When does the seller get paid? The timing of payment depends on the  type of LOC  used. The seller might get paid within a few days of submitting documents to a local bank. In other cases, the seller waits until certain conditions are met. Sometimes, the seller gets paid an “advance” (before shipping anything) so they can buy materials needed to produce the customer’s goods.

Frequently Asked Questions (FAQs)

How much does a letter of credit cost.

The fee for a letter of credit varies by lender, but it's usually a small percentage of the total funding amount that's being guaranteed.

What is the difference between a letter of credit and a standby letter of credit?

While a standard letter of credit guarantees payment in the transaction, a standby letter of credit only guarantees payment if something fails to happen. For example, if the buyer faces a cash flow crisis or goes out of business, a standby letter would ensure payment from the issuing bank.

Who pays for a letter of credit?

The buyer typically pays the costs of securing a letter of credit. In some cases, though, the cost could be shared between buyer and seller.

International Trade Administration, U.S. Department of Commerce. " Methods of Payment: Letter of Credit ."

21 February 2023

Letter of Credit [LC] Explained with Process & Example

There are several uncertainties that arise when buyers and sellers across the globe engage in maritime trade operations. Some of these uncertainties revolve around delayed payments, slow deliveries, and financing-related issues, among others. The sheer distances involved in international trade, different laws and regulations, and changing political landscape are just some of the reasons for sellers needing a guarantee of payment when they deliver goods through the maritime route to their sellers. Letters of credit were introduced to address this by adding a third party like a financial institution into the transaction to mitigate credit risks for exporters.

• What is a Letter of Credit?

A letter of credit or LC is a written document issued by the importer’s bank (opening bank) on importer’s behalf. Through its issuance, the exporter is assured that the issuing bank will make a payment to the exporter for the international trade conducted between both the parties.

The importer is the applicant of the LC, while the exporter is the beneficiary. In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and against specified documents.

A guiding principle of an LC is that the issuing bank will make the payment based solely on the documents presented, and they are not required to physically ensure the shipping of the goods. If the documents presented are in accord with the terms and conditions of the LC, the bank has no reason to deny the payment.

• Why is Letter of Credit important?

A letter of credit is beneficial for both the parties as it assures the seller that he will receive his funds upon fulfillment of terms of the trade agreement and the buyer can portray his creditworthiness and negotiate longer payment terms, by having a bank back the trade transaction.

• Features / Characteristics of letter of credit

A letter of credit is identified by certain principles. These principles remain the same for all kinds of letters of credit. The main characteristics of letters of credit are as follows:

Negotiability

A letter of credit is a transactional deal, under which the terms can be modified/changed at the parties assent. In order to be negotiable, a letter of credit should include an unconditional promise of payment upon demand or at a particular point in time.

Revocability

A letter of credit can be revocable or irrevocable. Since a revocable letter of credit cannot be confirmed, the duty to pay can be revoked at any point of time. In an irrevocable letter of credit, all the parties hold power, it cannot be changed/modified without the agreed consent of all the people.

Transfer and Assignment

A letter of credit can be transferred, also the beneficiary has the right to transfer/assign the LC. The LC will remain effective no matter how many times the beneficiary assigns/transfers the LC.

Sight & Time Drafts

The beneficiary will only receive the payment upon maturity of letter of credit from the issuing bank when he presents all the drafts & the necessary documents.

• Documents required for a Letter of Credit
• Shipping Bill of Lading
• Airway Bill
• Commercial Invoice
• Insurance Certificate
• Certificate of Origin
• Packing List
• Certificate of Inspection
• How does Letter of Credit Work?

LC is an arrangement whereby the issuing bank can act on the request and instruction of the applicant (importer) or on their own behalf. Under an LC arrangement, the issuing bank can make a payment to (or to the order of) the beneficiary (that is, the exporter). Alternatively, the issuing bank can accept the bills of exchange or draft that are drawn by the exporter. The issuing bank can also authorize advising or nominated banks to pay or accept bills of exchange.

Fee and charges payable for an LC

There are various fees and reimbursements involved when it comes to LC. In most cases, the payment under the letter of credit is managed by all parties. The fees charged by banks may include:

Opening charges, including the commitment fees, charged upfront, and the usance fee that is charged for the agreed tenure of the LC.

Retirement charges are payable at the end of the LC period. They include an advising fee charged by the advising bank, reimbursements payable by the applicant to the bank against foreign law-related obligations, the confirming bank’s fee, and bank charges payable to the issuing bank.

Parties involved in an LC

Main parties involved:

Applicant An applicant (buyer) is a person who requests his bank to issue a letter of credit.

Beneficiary A beneficiary is basically the seller who receives his payment under the process.

Issuing bank The issuing bank (also called an opening bank) is responsible for issuing the letter of credit at the request of the buyer.

Advising bank The advising bank is responsible for the transfer of documents to the issuing bank on behalf of the exporter and is generally located in the country of the exporter.

Other parties involved in an LC arrangement:

Confirming bank The confirming bank provides an additional guarantee to the undertaking of the issuing bank. It comes into the picture when the exporter is not satisfied with the assurance of the issuing bank.

Negotiating bank The negotiating bank negotiates the documents related to the LC submitted by the exporter. It makes payments to the exporter, subject to the completeness of the documents, and claims reimbursement under the credit.

(Note:- Negotiating bank can either be a separate bank or an advising bank)

Reimbursing bank The reimbursing bank is where the paying account is set up by the issuing bank. The reimbursing bank honors the claim that settles the negotiation/acceptance/payment coming in through the negotiating bank.

Second Beneficiary The second beneficiary is one who can represent the original beneficiary in their absence. In such an eventuality, the exporter’s credit gets transferred to the second beneficiary, subject to the terms of the transfer.

What is the process of getting an LC?

The process of getting an LC consists of four primary steps, which are enlisted here:

Step 1 - Issuance of LC

After the parties to the trade agree on the contract and the use of LC, the importer applies to the issuing bank to issue an LC in favor of the exporter. The LC is sent by the issuing bank to the advising bank. The latter is generally based in the exporter’s country and may even be the exporter’s bank. The advising bank (confirming bank) verifies the authenticity of the LC and forwards it to the exporter.

Step 2 - Shipping of goods

After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the goods shipping process.

Step 3 - Providing Documents to the confirming bank

After the goods are shipped, the exporter (either on their own or through the freight forwarders ) presents the documents to the advising/confirming bank.

Step 4 - Settlement of payment from importer and possession of goods

The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or negotiated, as the case may be. The issuing bank verifies the documents and obtains payment from the importer. It sends the documents to the importer, who uses them to get possession of the shipped goods.

What is an example of an LC?

Suppose Mr. A (an India based exporter) has a sales contract with Mr. B (an importer from Australia) for delivering a batch of medical equipment to the latter. Both parties being unknown to each other, decide to go for an LC arrangement. Company B applies for a letter of credit with a bank in Australia. The document assures Mr. A of the payment in exchange for the shipment of the cargo. From this point on, this is how a letter of credit transaction would unveil between Mr. A & Mr. B:-

• Mr. B (buyer) goes to their bank, that is, the issuing bank or opening bank, and requests to issue an LC.
• The issuing bank further processes the LC to the advising bank (A's India-based bank).
• The advising bank checks the authenticity of the LC and sends it to Mr. A.
• Now Mr. A will ship the goods.
• Furthermore, they will send specific trade documents, including the bill of lading, to the negotiating bank.
• The negotiating bank will make sure that all requirements are fulfilled and make the payment to Mr. A.
• Additionally, the negotiating bank will send all the necessary documents, including the bill of lading, to the issuing bank.
• The issuing bank will send these documents to Mr. B (Buyer) to confirm their authenticity.
• After the confirmation of shipment, Company B completes the payment to Company A in India.
• And the issuing bank will pass on the funds to the negotiating bank.
• If Company B is not able to furnish the required funds, their issuing bank completes payment on their behalf.

To understand the process clearly refer to this image:

• Letter of credit Sample Format

• Types of Letter of Credit

Following are the most commonly used or known types of letter of credit:-

• Revocable Letter of Credit
• Irrevocable Letter of Credit
• Confirmed Letter of Credit
• Unconfirmed Letter of Credit
• LC at Sight
• Usance LC or Deferred Payment LC
• Back to Back LC
• Transferable Letter of Credit
• Un-transferable Letter of Credit
• Standby Letter of Credit
• Freely Negotiable Letter of Credit
• Revolving Letter of Credit
• Red Clause LC
• Green Clause LC

To understand each type in detail read the article, Types of letter of credit used in International Trade .

What is the application process for an LC?

Importers have to follow a specific procedure to follow for the application of LCs. The process is listed here:

• After a sales agreement is created and signed between the importer and the exporter, the importer applies to their bank to draft a letter of credit in favor of the exporter.
• The issuing bank (importer’s bank) creates a letter of credit that matches the terms and conditions of the sales agreement before sending it to the exporter’s bank.
• The exporter and their bank need to evaluate the creditworthiness of the issuing bank. After doing so and verifying the letter of credit, the exporter’s bank approves and sends the document to the importer.
• After that, the exporter manufactures and ships the goods as per the agreed timeline. A shipping line or freight forwarder assists with the delivery of goods.
• Along with the goods, the exporter also submits documents to their bank for compliance with the sales agreement.
• After approval, the exporter’s bank then sends these complying documents to the issuing bank.
• Once the documents are reviewed, the issuing bank releases the payment to the exporter and sends the documents to the importer to collect the shipment.

What are the Benefits of an LC?

A letter of credit is beneficial for both parties as it assures the seller that they will receive their funds upon fulfillment of the terms of the trade agreement, while the buyer can portray his creditworthiness and negotiate longer payment terms by having a bank back the trade transaction.

Letters of credit have several benefits for both the importer and the exporter. The primary benefit for the importer is being able to control their cash flow by avoiding prepayment for goods. Meanwhile, the chief advantage for exporters is a reduction in manufacturing risk and credit risk. Ultimately, since the trade deals are often international, there are factors like location, distance, laws, and regulations of the involved countries that need to be taken into account. The following are advantages of a letter of credit explained in detail.

LC reduces the risk of late-paying or non-paying importers There might be instances when the importer changes or cancels their order while the exporter has already manufactured and shipped the goods. The importers could also refuse payment for the delivered shipments due to a complaint about the goods. In such circumstances, a letter of credit will ensure that the exporter or seller of the goods receives their payment from the issuing bank. This document also safeguards if the importer goes into bankruptcy.

LC helps importers prove their creditworthiness Small to midsize businesses do not have vast reserves of capital for managing payments for raw materials, equipment, or any other supplies. When they are in a contract to manufacture a product and send it to their client within a small window, they cannot wait around to free up capital for buying supplies. This is where letters of credit come to their rescue. A letter of credit helps them with important purchases and serves as proof to the exporter that they will fulfill the payment obligations, thus avoiding any transaction and manufacturing delays.

LCs help exporters with managing their cash flow more efficiently A letter of credit also ensures that payment is received on time for the exporters or sellers. This is especially important if there is a huge period of time between the delivery of goods and payment for them. Ensuring timely payments through the letter of credit will go a long way in helping the exporters manage their cash flow. Furthermore, sellers can obtain financing between the shipment of goods and receipt of payment, which can provide an additional cash boost in the short term.

• Bank guarantee vs letter of credit

A Bank guarantee is a commercial instrument. It is an assurance given by the bank for a non-performing activity. If any activity fails, the bank guarantees to pay the dues. There are 3 parties involved in the bank guarantee process i.e the applicant, the beneficiary and the banker.

Whereas, a Letter of Credit is a commitment document. It is an assurance given by the bank or any other financial institution for a performing activity. It guarantees that the payment will be made by the importer subjected to conditions mentioned in the LC. There are 4 parties involved in the letter of credit i.e the exporter, the importer, issuing bank and the advising bank (confirming bank).

Things to consider before getting an LC

A key point that exporters need to remind themselves of is the need to submit documents in strict compliance with the terms and conditions of the LC. Any sort of non-adherence with the LC can lead to non-payment or delay and disputes in payment.

The issuing bank should be a bank of robust reputation and have the strength and stability to honor the LC when required.

Another point that must be clarified before availing of an LC is to settle the responsibility of cost-bearing. Allotting costs to the exporter will escalate the cost of recovery. The cost of an LC is often more than that of other modes of export payment. So, apart from the allotment of costs, the cost-benefit of an LC compared to other options must also be considered.

FAQs on Letter of Credit

1. is letter of credit safe.

Yes. Letter of Credit is a safe mode of payment widely used for international trade transactions.

2. How much does it cost for a letter of credit?

Letters of credit normally cost 1% of the amount covered in the contract. But the cost may vary from 0.25% to 2% depending on various other factors.

3. Can a letter of credit be cancelled?

In most cases letters of credit are irrevocable and cannot be cancelled without the agreed consent of all parties.

4. Can a letter of credit be discounted?

A letter of credit can be discounted. While getting an LC discounted the supplier or holde of LC should verify whether the issuing bank is on the approved list of banks, with the discounting bank. Once the LC is approved, the discounting bank releases the funds after charging a certain amount as premium.

5. Is a letter of credit a not negotiable instrument?

A letter of credit is said to be a negotiable instrument, as the bank has dealings with the documents and not the goods the transaction can be transferred with the assent of the parties.

6. Are letters of credit contingent liability?

It would totally depend on future circumstances. For instance, if a buyer is not in a condition to make the payment to the bank then the bank has to bear the cost and make the arrangement on behalf of the buyer.

7. A letter of credit is with recourse or without recourse?

A 'without recourse' letter of credit to the beneficiary is a confirmed LC. Whereas an unconfirmed or negotiable letter of credit is 'with recourse' to the beneficiary.

8. Who is responsible for letters of credit?

The issuing bank takes up the responsibility to complete the payment if the importer fails to do so. If it is a confirmed letter of credit, then the confirming bank has the responsibility to ensure payment if the issuing bank and importers fail to make the payment.

The Uniform Customs and Practice for Documentary Credits (UCP) describes the legal framework for all letters of credit. The current version is UCP600 which stipulates that all letters will be irrevocable until specified.

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Table of Content

• Letter of Credit - Process
• Letter of Credit with Example

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Passages The International Trade Blog

The importance of meeting deadlines in a letter of credit.

Our firm has just begun to use letters of credit for our transactions, and I am the only one who is responsible for preparing all of the documents. What a headache!

Here's a situation that I faced just last week: The buyer's forwarder is booking the cargo with the ocean carrier. He told me that the earliest we can get our product on the ship is in two weeks, but that is after the unconfirmed letter of credit expires for shipping. Our customer is in India. They told us in an email to just go ahead and ship the goods and they will advise their bank to waive the discrepancies.

I am confused and I am having a difficult time explaining what this means to my boss who has told me to just ship the stuff; he said it's the buyer's problem once it leaves our dock.

Sincerely, Lost in a Letter of Credit

Dear Lost in a Letter of Credit,

Whether you are new with letters of credit or have years of experience, they are a headache. Here is a key phrase to pass on to your boss: A letter of credit does guarantee payment!

An unconfirmed letter of credit is a promise by the buyer's bank in India to pay your firm upon the successful error-free completion and presentation of the documents by a specific date stated in the letter of credit. If a date is not stated, Article 14 states you have 21 days from the bill of lading date to present your documents.

(Article 14 is found in a set of rules adopted by the bank and published the by International Chamber of Commerce. The rules are the Uniform Customs and Practices for Documentary Credits, Publication Number 600 .)

Among the documents that must be presented is an international bill of lading showing that the goods were shipped according to the date specified in the letter of credit. Shipping after the date specified in the letter of credit is considered an error or, as a banker will tell you, "A late shipment is a discrepancy."

Your firm is at risk for non-payment if the buyer's forwarder ships the goods on the vessel after the latest shipment date. The Indian bank that issued the letter of credit might not pay you due to the discrepancy. It is often wise to hold the shipment then ask the buyer to amend the letter of credit to extend the latest shipping date, the date for latest presentation of the documents (if specified), and the expiration of the letter of credit.

My hat is off to you! Keep asking questions.

Now for some suggestions on what to do next:

First, consider using Incoterms that give you the authority to choose the forwarder and the international carrier. Under Incoterms 2020 , those are  such as CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), CFR (Cost and Freight), or CIF (Cost, Insurance and Freight).

Second, create a letter of credit template to send to your customers. Roy Becker offers a sample template in his article, How to Avoid the Most Common Errors in a Letter of Credit .

Third, request training from your international banker, forwarder, trade association or an independent training group like International Business Training .

Fourth, join an international trade association that has online discussions of international payment options.

All the best! Cathy Petersen

About the Author: Catherine J. Petersen

In 1992, Catherine Petersen founded C J Petersen & Associates, LLC, a research, instruction and consulting firm located in St. Paul, Minnesota, USA. She has designed documentation and procedure manuals for exporters and has authored/co-authored five books.

Ms. Petersen has had day-to-day practical experience at a freight forwarder, a trading company, and an ocean carrier; she has been active in international business since 1980. Her background led her to develop C J Petersen & Associates, LLC, which is a collaborative consultancy that works with clients to identify compliance gaps and to resolve them. Ms. Petersen retired in 2022.

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VIDEO | Demystifying UCP 600: an insider’s look at rules underpinning the letter of credit

VIDEO: Learn more about the letter of credit and the rules governing its use in this four-part interview series with Pradeep Taneja of ICC Bahrain. Includes: tips and explanations of the UCP 600 and the evolution of the rules.

By Pradeep Taneja , Carter Hoffman

Last modified Monday February 5, 2024

The letter of credit may be one of the most important types of documents in the world underpinning vast amounts of the internationally traded goods that we enjoy today. 

Despite its ubiquity, however, the rules and best practices for using this critical document can take time to grasp, even for some that are well-engrained in the international trade sphere.

To learn more about the letter of credit and the rules governing its use, Trade Finance Global (TFG) spoke with Pradeep Taneja, Managing Director of Taneja Global Trade Consulting, Bahrain and Co-Chairman and Board member of ICC Bahrain.

Part 1 – What is a Letter of Credit and what are the benefits to its users?

Part 2 – Explanation of the UCP 600 rules and history of UCP

Part 3, Evolution of UCP 600 rules – will we see UCP 700 rules?

Part 4 – 3 tips for using UCP 600 rules in Letters of Credit

The letter of credit from 10,000 feet

At a high level, a letter of credit is a financial instrument that enables trade and trade finance to happen by providing assurance to both the importer and exporter in an international transaction. 

It is a letter from a bank to the beneficiary that guarantees payment to the exporter if the exporter can provide the documents specified in the letter of credit. 

This helps mitigate the risk of non-payment for the exporter and provides assurance to the importer that they will receive the goods they paid for and the necessary documents for customs clearance. 

A letter of credit also helps ensure that the imported goods comply with regulatory requirements and international trade agreements. 

Taneja said, “The simplest definition I learned was it is just a letter addressed to the beneficiary by a bank. ‘Dear sir, if you ship the following cargo to my client and present the following documents to me, I hereby undertake to pay you provided the documents are in accordance with what I am asking for.’” 

Overall, a letter of credit helps facilitate international trade and mitigate the risks involved in cross-border transactions.

The rules governing letters of credit 

The Uniform Customs and Practice for Documentary Credit rules are a set of international rules created by the International Chamber of Commerce (ICC) to provide clear and standardised rules for using letters of credit issued by banks worldwide. 

These rules were first developed in response to the need for a clear and consistent framework to minimise misunderstandings and disputes between parties involved in international trade, particularly due to large geographic distances as well as language and cultural differences. 

The various renditions of the UCP rules have been given a statutory basis by certain countries and can be subject to local laws if they conflict with the provisions therein. 

The rules define the roles and responsibilities of the parties involved in a letter of credit transaction, including the importer (applicant), the exporter (beneficiary), and the banks. 

UCP 600 is the latest revision of the UCP rules, and it was developed to address issues with the previous version, UCP 500. 

Taneja said, “To understand UCP 600 I always suggest you know UCP 500. But to know UCP 500, you must know UCP 400, and so forth. Each rendition is an improvement on the disadvantages of the previous.”

The main disadvantage of UCP 500 was the use of imprecise interpretative terms and phrases, which led to disputes. 

For example, UCP 500 stated that a bank should examine documents presented under a letter of credit with reasonable care and within a reasonable time. 

However, it did not provide clear definitions for these terms leading to inconsistent interpretations and disputes over the examination period.

To address these issues, UCP 600 removed the term “reasonable”, adding a maximum period of five banking days for banks to examine the documents. 

The UCP 600 rules benefit all parties involved in international trade transactions, including banks, negotiating banks, importers, and exporters. 

The rules provide a clear framework for processing and examining documents, reducing the risk of disputes and delays. 

By creating a more standardised process, UCP 600 enables banks to conduct their business more efficiently and effectively, benefiting importers and exporters by reducing transaction costs and increasing trade.

Is there a need for a UCP 700?

There have been criticisms of certain provisions of UCP 600, and some experts have been discussing the need for a revised set of rules for a long time, with some hinting towards the creation of UCP 700 rules. 

However, the Executive Committee of the ICC Banking Commission has reviewed this and concluded that there was no justification for revision, Besides, it is a very expensive exercise to revise UCP 600, involving not just changing the publication but also efforts to assist with implementation, training, and system alignment. 

Furthermore, there are some practical limitations involved with fixing some of the discrepancies, such as late shipment, late presentation and LC expired, that exist in the current regime will remain even if UCP rules are revised.

Taneja said, “You can’t do anything about a discrepancy like late shipment or late presentation of documents, for example. A significant number of documents are rejected globally based on these particular discrepancies. Even if you revise UCP, you can’t fix that.”

Despite criticisms, the ICC Banking Commission’s Executive Committee announced in 2017 that there is no need to revise UCP 600. Banks have happily accepted it, making it unlikely that there will be UCP 700 rules anytime soon. 

Practical tips for using UCP 600

Taneja provides some general and practical tips for those in the trade finance community using the UCP 600 rules to conduct their international trade and trade finance practices. 

For exporters and beneficiaries:

• Understand the definition of “complying presentation” in UCP 600.
• Ensure compliance with the terms and conditions of the letter of credit.
• Understand International Standard Banking Practice (ISBP) 745, which complements and accompanies UCP 600 in articulating how the rules are to be applied.
• Review the conditions of the LC thoroughly and seek amendments if necessary before proceeding with the shipment.
• Create checklists to ensure compliance with UCP 600 and the LC terms and conditions.

For issuing banks:

• Make LCs simple and avoid giving excessive details to prevent problems for exporters, importers, and the bank itself.
• Consider the interest of all parties involved and avoid creating complexities that may hinder successful transactions.

For advising and confirming banks:

• Conduct some basic checks to ensure compliance with sanctions laws and regulatory expectations including dual usage of goods, and price checks to avoid instances of overpricing/underpricing, i.e., Trade-Based Money Laundering (TBML).
• Ensure that the LC is workable when confirming it.

These simple ideas can improve understanding of and compliance with UCP 600, leading to the facilitation of trade finance transactions and smoother international trade.

(1). What is a Letter of Credit and what are the benefits to its users?

(2). Explanation of the UCP 600 rules and history of UCP

(3). Evolution of UCP 600 rules – will we see UCP 700 rules?

(4). 3 tips for using UCP 600 rules in Letters of Credit

Download the article here

About the Author(s)

Pradeep Taneja

Pradeep Taneja is the founder member and Chairman of ICC Bahrain Trade Finance Forum, Board member and Co-Chairman of ICC Bahrain.

Carter Hoffman

Carter is a Research Associate at Trade Finance Global focusing on the impact of macroeconomic trends and emerging technologies on international trade. His work has been featured in publications and articles supported by the SME Finance Forum, managed by the International Finance Corporation, World Trade Organization, and International Chamber of Commerce.

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IR-2024-95, April 5, 2024

WASHINGTON —The Internal Revenue Service today advised taxpayers, including self-employed individuals, retirees, investors, businesses and corporations about the April 15 deadline for first quarter estimated tax payments for tax year 2024.

Since income taxes are a pay-as-you go process, the law requires individuals who do not have taxes withheld to pay taxes as income is received or earned throughout the year. Most people meet their tax obligations by having their taxes deducted from their paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation.

Generally, taxpayers who are self-employed or in the gig economy are required to make estimated tax payments . Likewise, retirees, investors and others frequently need to make these payments because a significant portion of their income is not subject to withholding.

When estimating quarterly tax payments, taxpayers should include all forms of earned income, including part-time work, side jobs or the sale of goods or services commonly reported on Form 1099-K .

Income such as interest, dividends, capital gains, alimony and rental income is normally not subject to withholding. By making quarterly estimated tax payments, taxpayers can avoid penalties and uphold their tax responsibilities.

Certain groups of taxpayers, including farmers and fishers, recent retirees, individuals with disabilities, those receiving irregular income and victims of disasters are eligible for exceptions to penalties and special regulations .

Following recent disasters, eligible taxpayers in Tennessee , Connecticut , West Virginia , Michigan , California and Washington have an extended deadline for 2024 estimated tax payments until June 17, 2024. Similarly, eligible taxpayers in Alaska , Maine and Rhode Island have until July 15, 2024, and eligible taxpayers in Hawaii have until Aug. 7, 2024. For more information, visit Tax relief in disaster situations .

In addition, taxpayers who live or have a business in Israel, Gaza or the West Bank, and certain other taxpayers affected by the terrorist attacks in the State of Israel , have until Oct. 7, 2024, to make estimated tax payments.

Paying estimated taxes

Taxpayers can rely on Form 1040-ES, Estimated Tax for Individuals , for comprehensive instructions on computing their estimated taxes.

Opting for the IRS Online Account streamlines the payment process, allowing taxpayers to view their payment history, monitor pending payments and access pertinent tax information. Taxpayers have several options to make an estimated tax payment, including IRS Direct Pay , debit card, credit card, digital wallet or the Treasury Department's Electronic Federal Tax Payment System (EFTPS) .

To pay electronically and for more information on other payment options, visit IRS.gov/payments . If paying by check, be sure to make the check payable to the "United States Treasury."

Publication 505, Tax Withholding and Estimated Tax , offers detailed information for individuals navigating dividend or capital gain income, alternative minimum tax or self-employment tax, or who have other special situations.

The IRS recommends taxpayers use the Tax Withholding Estimator tool to accurately determine the appropriate amount of tax withheld from paychecks.

Regularly monitoring withheld taxes helps mitigate the risk of underpayment, reducing the likelihood of unexpected tax bills or penalties during tax season. It also allows individuals to adjust withholding upfront, leading to larger paychecks during the year and potentially smaller refunds at tax time.

Filing Options

The IRS encourages people to file their tax returns electronically and choose direct deposit for faster refunds. Filing electronically reduces tax return errors because tax software does the calculations, flags common errors and prompts taxpayers for missing information.

The IRS offers free online and in-person tax preparation options for qualifying taxpayers through the IRS Free File program and the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs .

In addition, the Direct File pilot program, a new option that allows eligible taxpayers to file their federal tax returns online directly with the IRS for free, is currently available in 12 participating states.

Assistance available 24/7 on IRS.gov

IRS.gov offers tax assistance 24/7. To address general tax concerns, taxpayers can access various online tools on the IRS website, to include the Interactive Tax Assistant , tax topics and frequently asked questions to get answers to common questions.

The IRS has also posted translated tax resources in 20 other languages on IRS.gov to communicate to taxpayers who prefer to get information in other languages. For more information, see the IRS Languages page on IRS.gov.

More information:

⦁     Topic no. 653, IRS notices and bills, penalties, and interest charges

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