P0002 Purpose Code
According to the RBI, it is for the transactions related to: “Repatriation of Indian investment abroad in debt securities.”
Indian investors, whether individuals or companies, use this code when they wish to repatriate funds that they previously invested in foreign companies by purchasing their issued debt securities. These investments represent loans given to foreign companies through the purchase of their bonds or similar instruments. The repatriated amount may include interest income, the original principal, or both.
For example:- An Indian company or an individual investor invests $1 million in a German company by purchasing its bonds and debentures. After 5 years, the investor earns $250,000 in interest and decides to transfer either the full amount ($1.25 million) or just the interest ($250,000) back to India. For this, the investor will use the code P0002.
Conditions Under Which Investments in Debt Securities Are Repatriated to India
- When the investor sells the foreign bond or debenture after it reaches its maturity date.
- When the investor chooses to sell the bond before maturity in the market or back to the issuer.
- When the investor only wishes to bring the interest, also known as coupon payments, back to India.
- When the investor wants to exit international investments or switch to Indian assets. This is mostly done due to market instability.
- When the investor wants the funds to comply with regulatory requirements, like FEMA guidelines or tax declarations.
- When the investor, at the end of a financial year, chooses to consolidate and bring back overseas earnings, especially if they’re planning new remittances under the LRS for the next year.
Important Rules for Repatriation
- Investment Must Be Lawful – This means that the investor should follow the guidelines mentioned under the Foreign Exchange Management Act (FEMA), laid down by the RBI.
- 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) Banks by the RBI.
- Use of the Liberalised Remittance Scheme (LRS) – This is an important factor when using the code P0002 while bringing previously invested money in foreign bonds and debentures. However, this scheme is not directly used to bring money back, but is used to send money out of India initially for investing in debt securities. Under this scheme, the investor is allowed to remit up to $250,000, as of 2025, for investment purposes without prior approval from the Reserve Bank of India, avoiding legal obstructions.
- Time Limit – Unlike purpose code P0001, which has a 90-day limit, there is no time limit in P0002. However, certain formalities have to be finished before repatriating funds to India.
- Keeping Proofs and Filing Necessary Documents – It is very essential to keep proof of tax paid abroad (e.g., broker or bank statement, tax deduction certificate). It is also to be noted that Form 67, essential for filing the FTC, is required by the AD Bank and the RBI before the investor files the Indian ITR.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Investors repatriating money to India must file several forms before starting the process. Usually, the transactions are via bank transfers, and your bank will ask you to provide a purpose code by giving a form to fill out. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, and we will try our best to help you out.
All About Tax
Taxation Norms for Indian Resident Individuals and Companies Registered in India
Individual
When an investor brings money back to India from foreign bonds, they may have to pay tax depending on how the money was earned. If the investor earned interest, it is taxed like regular income based on their tax slab. If they sell the bond for a profit, it is called a capital gain and will be taxed according to the RBI’s guidelines.
If an individual holds a bond for less than 36 months, the profit is classified as short-term capital gains and is taxed as regular income. However, if they hold the bond for more than 36 months, it is considered long-term capital gains. In this case, the profit is taxed at a flat rate of 20%, and they can benefit from indexation. It is a taxation method that adjusts an asset’s purchase price for inflation, resulting in a lower tax burden.
Examples:-
- Long Term Capital Gains – Rahul, an Indian investor, earned interest and made a profit by selling U.S. bonds after holding them for four years. When he brought the money back to India, the interest was taxed as regular income, and the profit was taxed at 20% with indexation, which reduced his taxable amount and saved him some tax.
- Short Term Capital Gains – Ravi, an Indian investor, bought bonds from a European company and sold them after 2 years at a profit. Since he held the bonds for less than 3 years, the profit was treated as short-term capital gain and taxed according to his income tax slab.
Company
When a company brings back money from foreign debt investments, capital gains are taxed at corporate tax rates. Unlike individuals, companies usually do not get indexation benefits. Indian companies follow local tax slabs; however, the taxation may vary as per the DTAA treaty with the country from which the company is bringing the money.
It is important to note that the time frame for long-term and short-term capital gains taxation for companies matches that of individual investors, where holdings of 36 months or more are treated as long-term capital gains (LTCG), and holdings of less than 36 months are treated as short-term capital gains (STCG).
Tax or No Tax?
In some situations, repatriated income may not be taxed at all or might be rebated in India. As an Indian investor in foreign bonds and debentures, it is important to note that any income earned from these investments is taxable in India, unless a tax exemption or treaty applies. Here are the common exemptions:
- Tax Deducted at Source (TDS) and Filing Foreign Tax Credit (FTC) (Section 90/91) – An investor who has invested in debt securities may have their capital gains subjected to TDS. However, if they have paid tax abroad, they can claim a credit for that tax when filing the Indian Income Tax Return. This avoids double taxation on the same income; however, it depends on whether India has entered into a Double Taxation Avoidance Agreement (DTAA) with the country. The percentage of exemption is determined by the agreed rate between India and the other country. To know more about the countries with which India has DTAA, click here.
It is to be kept in mind that an investor can claim that 15% tax paid in the US as a credit against their Indian tax using the Foreign Tax Credit.
- Basic Tax Rebate (Section 87A – for individuals) – If an investor’s total taxable income, including the capital made from investments in foreign debentures, is below Rs. 7 lakh, they can claim a rebate of up to Rs. 25,000 under Section 87A, which can reduce their tax. However, it should be noted that the income here refers to not just the principal amount and the interest, but the entire income earned by the investor.
- No Profit, No Tax – If the investor brings back only the original investment amount (principal amount) and not the profit (interest), then no tax is charged.
- Exemptions for Specific Bonds – If an investor purchases government, corporate, and municipal tax-free bonds in a foreign country, the Reserve Bank of India (RBI) may impose taxes, but this depends on the status of the Double Taxation Avoidance Agreement (DTAA) with the country in which the bonds were purchased and whether the Indian government has granted partial or complete exemptions for the specifically purchased foreign bonds under the Foreign Exchange Management Act (FEMA) or the Income Tax Act (IT Act).
- Capital Loss Set-Off or Carry Forward – If an investor incurs a loss while transferring their investment funds back to India, they have two options to recover that loss. They can either generate additional capital and pay taxes only on the earnings that exceed their original investment amount, or they can choose to carry the loss forward for up to eight years by submitting a request to the Reserve Bank of India (RBI).
Example – An Indian investor bought a debt security from a U.S. company for $50,000 in 2013. In 2016, they sold it and brought back (repatriated) only $30,000, resulting in a capital loss of $20,000.
Scenario 1: Set-Off
In the same year, the investor made a $30,000 capital gain by selling a property in India. They can offset the $20,000 loss from the bond against this gain. So, they’ll only pay tax on the remaining $10,000 capital gain.
Scenario 2: Carry Forward
If the investor had no capital gains that year, the $20,000 loss can be carried forward. This means they can use it to reduce capital gains in the next 8 assessment years, helping them save tax when gains do occur. However, to avail this benefit, it is essential to file an Income Tax Return (ITR) with the AD Bank before appealing to the RBI.
For an NRI
The rules of taxation are the same in India for a Non-Resident Indian (NRI). However, some variation in taxation is there. Let us go through some of them –
Taxation on Interest & Capital Gains:-
- They may be taxed differently under Section 115E or DTAA.
- Interest on income from foreign bonds may be taxable or exempt, depending on the country and type of bond.
- An NRI cannot claim the indexation benefit on debt instruments unless they become residents again.
- If there’s a capital loss, both Indian residents and NRIs may be able to set it off or carry it forward under similar rules, provided they file income tax returns in India.
Repatriation Limit:-
- An NRI can repatriate up to $1 million per financial year from their NRO account only after paying applicable taxes. However, if they invest through their NRE (Non-Resident External) account or FCNR (Foreign Currency Non-Resident) account, there is no capping, but prior permission from the RBI is needed.
P0002 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0002 would be used to report transactions in India:-
- Indian Company Repatriating Total Earnings from Foreign Bonds:-
An Indian company invested in U.S. government bonds in 2017. In 2020, after the bonds matured, the company returned the money, consisting of the principal amount and the interest earned, back to India. Since this money originated from a foreign debt investment, the company will use the RBI Purpose Code P0002 to transfer funds to ensure proper reporting.
- Indian Individual Investor Returning Interest from Foreign Bonds:-
An Indian resident had invested in a bond issued by a UK-based company and earned annual interest income from it. When the interest earnings were repatriated to an Indian bank account, the AD bank was informed, and the transaction was reported using Purpose Code P0002, since the funds originated from a foreign debt security investment.
- Business Selling Overseas Debentures:-
In 2020, an Indian company invested USD 1 million in debentures from a U.S.-based infrastructure company as part of its overseas strategy. In 2025, it sold the debentures for USD 1.2 million, earning a capital gain of USD 200,000. The company then repatriated the full proceeds back to India, working with its AD bank, which reported the inward remittance under Purpose Code P0002 for repatriating capital from foreign debt securities.
- Indian Mutual Fund Selling Offshore Bonds and Bringing the Capital to India:-
An Indian mutual fund management company had invested $5 million in corporate bonds issued by a foreign company under its international investment scheme in 2010. These bonds were held in the fund’s offshore portfolio for three years, during which they paid annual interest along with the principal amount at maturity. After this period, the company decided to repatriate the capital back to India. To do this, the company must use the code P0002 to declare the money being brought back.
- Bank Repatriating Capital Gains from Foreign Debentures Back to India:-
A bank in India had previously invested in debentures issued by a company based in the United States. After holding these debentures for a few years, the bank sold them at a higher price than what it had paid, earning a capital gain. The bank can then either bring back the capital gain or the total amount invested, or both. To declare the income being brought back to India, the bank has to use the code P0002 with the RBI to declare the wealth being brought back to India.
- An NRI Repatriating Money to India from Abroad:-
An NRI who previously invested in foreign debt securities using funds from India under the Liberalised Remittance Scheme (LRS) may repatriate the returns to India when the investment matures or is sold. For example, if the NRI invested in U.S. corporate bonds and later receives the proceeds, including interest or capital gains, they can bring the money back to India using the RBI Purpose Code P0002.
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