What are RBI’s Purpose Codes?
When money comes into or goes out of India through foreign investment, exports, imports, or
repatriation, the Reserve Bank of India (RBI) needs to know the reason for the transaction.
To simplify this process, the RBI has created a list of Purpose Codes. These are short, unique codes
that explain why the money is being transferred.
Knowing and using the correct Purpose Code is essential for ensuring smooth and legal capital
transfers.
What is the use of Purpose Code?
- They help report international transactions to the RBI.
- They identify the nature of the foreign exchange transaction, such as making a new
investment abroad, adding funds to a previous foreign investment, and disinvesting. - They ensure that the RBI rules regarding the use of foreign exchange are being followed.
P0001 Purpose Code
According to RBI, it is for the transactions related to: “Repatriation of Indian investment abroad in equity capital (shares)”
This code is used when an Indian investor, whether an individual, company, or organisation, brings
money back to India after selling shares in a foreign company, which were purchased previously or
due to the closure (liquidation) of the company. The money being brought back could be the original
investment, profits, or both.
Important Rules for Repatriation
To bring back money to India from foreign investments, some key rules must be followed:
- Use of Proper Banking Channels – The money must be brought back to India through normal
and legal banking channels, like transferring through a bank, and not by cash. Such banks are
referred to as Authorised Dealer (AD) Bank by the RBI. - Time Limit – It should be noted that the RBI must be informed of the repatriation within 90
days following the sale of shares or the closure and distribution of the company's assets in
which the investment was made.
How to report the purpose of transaction to RBI by giving Purpose Code: Usually the transactions are via bank transfers and your bank will ask you to provide purpose code by giving a form to fill. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, we would try our best to help you out.
Tax or No Tax?
In some situations, repatriated income may not be taxed in India. Here are the common exemptions:
No Profit, No Tax – If the investor brings back only the original investment amount and not the profit, then no tax is charged.
Double Taxation Avoidance Agreement (DTAA) – If the investor has already paid tax in the foreign country, and that country has a DTAA with India, then the RBI may reduce the tax or not apply it. However, the percentage of exemption is determined by the agreed rate between India and the other country.
India has DTAAs with 94 countries including the US, UK, Canada, Japan, China, Germany, and Australia.
Know more about the countries with which India has a DTAA, here.
If An Investor Is an NRI – According to Section 115F of the Income Tax Act, the Reserve Bank of India (RBI) may not impose taxes on capital gains earned by a Non-Resident Indian (NRI) if the NRI chooses to reinvest the gains into specified government assets within six months. These eligible assets include purchasing shares in an Indian company, investing in bonds and debentures issued by any Indian public company, acquiring Central Government Securities, and buying units of mutual funds or UTI (Unit Trust of India).
Timing of Investment – If the foreign investment was made before certain tax rules changed, the investor might be protected from new taxes (this is called “grandfathering”).
For Example: Income from investments made before 1 April 2017 may be exempt from certain tax rules implemented/amended by the Government of India after that date.
Investing the Repatriated Money in A Trust – The RBI may exempt taxes on returned capital if the investor reinvests the capital in a trust or a social cause fund.
P0001 Purpose Code Use Case Examples:
Here are some real-life examples where Purpose Code P0001 would be used in transactions in India:
- Sale of Indian Equity Investments by Foreign Investor:
- A foreign investor in the United States who has invested in shares of an Indian company decides to sell their equity holdings. After the sale, the proceeds are repatriated to the U.S.
- Purpose Code P0001 is used for the transfer of these proceeds back to the investor’s home country (USA), representing the repatriation of capital from their equity investment.
- Foreign Investor Liquidating Indian Subsidiary:
- A company based in the UK owns a 100% stake in an Indian subsidiary. The company decides to liquidate the subsidiary and repatriate the capital to the UK.
- After the liquidation, the funds are transferred back to the UK, and the transaction is reported using Purpose Code P0001 for repatriating equity investment.
- Foreign Portfolio Investor (FPI) Withdrawing Capital from Indian Stock Market:
- A foreign institutional investor based in Singapore has invested in Indian equities via the stock market. The investor decides to withdraw part of the investment and repatriate the funds back to Singapore.
- The transaction of transferring the capital from India to Singapore for the foreign investor is recorded under Purpose Code P0001 as it is a repatriation of capital from foreign investments in equity.
- Repatriation of Capital after Sale of Shares by NRIs:
- An NRI (Non-Resident Indian) in the Middle East sells shares of an Indian company they had invested in years ago. After the sale, they transfer the proceeds back to their bank account in Dubai.
- The inward remittance is processed under Purpose Code P0001, which captures the repatriation of the proceeds from their equity investments.
- Disinvestment of Indian Venture Capital Fund (VCF) by Foreign Investors:
- A venture capital fund with foreign investors decides to disinvest its holdings in an Indian startup. The proceeds from the sale of shares of the startup are transferred back to the investors’ respective home countries.
- These funds are repatriated under Purpose Code P0001, since it is related to the return of capital invested in Indian equity.
In all these cases, the underlying transaction involves the return of funds to a foreign investor (or entity) due to the sale or liquidation of their investments in Indian equity or equity-related instruments. The purpose code P0001 is used to report the repatriation of capital, in line with RBI’s guidelines on inward remittances for such transactions.
