P0003 Purpose Code
According to the RBI, it is for the transactions related to “Repatriation of Indian investment abroad in branches.”
When an Indian company brings money back to India from a branch it has established in another country, it falls under this category. This can include profits earned by the branch, any surplus funds that are not needed for its operations, or even the original capital that was sent abroad to set up or run the branch. The process of bringing this money back is called repatriation and is reported under RBI Purpose Code P0003.
For example:- If an Indian company opens a branch in the U.S. or UK, and that branch earns profits or finishes a project and no longer needs all the funds, the company may transfer some or all of that money back to India. When doing so, the transaction must be reported to the bank using Purpose Code P0003, which tells the RBI that this money is from an Indian company’s branch abroad.
Important Rules for Repatriation
- Applicable Entity – P0003 is used only by businesses repatriating earnings or capital from their foreign branches to India and not by individuals. Only a company, partnership firm, or other eligible business structure under Indian law can legally open and operate a branch abroad, usually with prior approval under FEMA (Foreign Exchange Management Act) rules.
- 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.
- Permissible Sources of Repatriation – Money repatriated includes profits earned by the foreign branch, surplus operational funds, and capital brought back after winding up the branch.
- Regulatory Compliance – Any investment made abroad should have been reported to the RBI through the Form ODI (Overseas Direct Investment).
- 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.
- Time Limit – Unlike purpose code P0001, which has a 90-day limit, there is no time limit in P0003. However, certain formalities have to be finished before repatriating funds to India. These formalities may include updating the RBI within 90 days of the closure of the foreign branch through their ODI portal. This is done to keep the RBI updated about the income earned from the branch before its closure and its real-time operational status. Any delay in reporting or incorrect filing can lead to compliance issues or FEMA violations.
- Use of the Liberalised Remittance Scheme (LRS) – Use of LRS is not required for this code, as LRS is only meant for Indian individual investors and not companies or organisations. The companies can repatriate as much as they want; however, the limit may be dependent upon the ODI rules.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Companies 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.
Tax Rules
- Profits from the foreign branch – All the profits earned from a foreign branch are taxable in India by the RBI under the “Business Income” head.
- Not considered as a separate entity – According to the Indian law, a branch is not a separate legal entity, and all its income is treated as the Indian company’s income. Therefore, even if the income is earned abroad, it’s taxable in India (resident taxation basis).
- Rules of Use by an NRI – An NRI (Non-Resident Indian) running a company in India can use Purpose Code P0003, but only if the Indian company has set up a branch office in another country and is bringing back funds (like profits or capital) from that foreign branch to India. This code is also applicable to NRIs who are partners in a company and do not completely own the company.
Tax or No Tax?
In some situations, repatriated income may not be taxed at all or might be rebated in India. Since Business Income is taxable in India, there are some instances in which a rebate can be granted by the RBI. Here are the common exemptions:
- Filing Foreign Tax Credit (FTC) (Section 90/91) – A company can claim a tax rebate under the Indian Income Tax law if it has already paid tax in the country where the branch is located. This is claimed while filing the Indian Income Tax Return for the financial year. The percentage of tax exemption is dependent on the factor whether India is in a Double Taxation Avoidance Agreement (DTAA) with the country where the branch is located. India has DTAA with 90+ countries. To learn more about the countries in which India has DTAA, click here.
- Capital Loss Set-Off or Carry Forward – If a foreign branch of an Indian company makes a loss, that loss can help reduce the company’s tax burden in India. Since the branch is part of the same legal entity, the loss can be adjusted against the company’s other business profits in India for that year. This means the company will pay tax only on the remaining income after subtracting the branch’s loss. If the company doesn’t have enough profits to set off the entire loss in the same year, it can carry the remaining loss forward for up to eight years and use it to reduce future business income. This helps lower the company’s overall tax over time.
For Example:- An Indian company that also has a branch in Singapore earns Rs. 1 crore from its business in India during a financial year. However, its Singapore branch faces a loss of Rs. 30 lakh. Since both the Indian office and the Singapore branch are part of the same company, the loss from Singapore can be subtracted from the profit made in India. This means the company’s taxable income in India comes down to Rs. 70 lakh instead of Rs. 1 crore, which helps reduce the amount of tax it has to pay. If the company doesn’t have enough profit in India to adjust the full Rs. 30 lakh loss in that year, it can carry forward the loss and use it to reduce its tax in future years, up to eight years later, whenever it earns a profit.
- No Profit, No Tax – If the company does not earn any profit from the branch, and it decides to close the branch and liquidate it, then the company need not pay any tax as it is bringing back the original invested amount to India.
- Reducing Tax Liabilities – Unlike individual taxpayers, companies cannot get a tax rebate in India because they are taxed under corporate tax rules. However, they can still lower the amount of tax they have to pay in other ways.
Methods of Reduction:- If they have already paid tax in another country, they can claim credit for that amount in India through the FTC. They can also reduce their taxable income by showing certain expenses like depreciation or money spent on research and development. Some companies may also qualify for lower tax rates, like 22%, if they meet certain conditions under Indian tax laws (mentioned under Article 115BAA).
Conditions to Qualify for 22% Tax Rate:- A company can receive tax benefits when it does not claim tax deductions while citing additional depreciation and investment, and research and development-related reimbursements. It is also to be noted that once the company opts for this 22% rate, the choice cannot be changed or withdrawn in future years.
- Tax Rebate in the Special Economic Zone (SEZ) – Companies operating in Special Economic Zones (SEZs) in India, or having units in SEZs, can claim tax deductions under Section 10AA of the Income Tax Act. These deductions can include benefits such as 100% tax exemption on export profits for the first 5 years, 50% exemption for the next 5 years, and 50% exemption of reinvested profits for another 5 years.
SEZ tax benefit vs. 22% tax rate (Article 115BAA):- It’s important to understand that the tax relief under Section 115BAA and the tax benefits available to SEZ units under Section 10AA are interconnected. If a company operating in a Special Economic Zone (SEZ) chooses to claim the tax exemption under Section 10AA, it cannot opt for the reduced 22% corporate tax rate under Section 115BAA. Similarly, if the company chooses the 22% tax rate, it must give up the SEZ tax benefits.
For Example:- An Indian company with a unit in an SEZ gets tax exemption under Section 10AA. If it chooses the 22% tax rate under Section 115BAA, it must give up those SEZ benefits. So, the company has to choose between the SEZ tax exemption and the reduced tax rate; it can not have both.
P0003 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0003 would be used to report transactions in India:-
- An Indian Manufacturing Company with a Foreign Branch:-
An Indian company opens a branch office in Germany to manage its sales across Europe. After operating for a few years, the German branch started earning profits and sent Rs. 50 lakh of its earnings back to the main company in India. This transfer of money is reported under Purpose Code P0003, which is used for remittances from overseas branches to their Indian head office.
- An Indian IT Firm Repatriating Surplus from US Branch:-
An Indian IT firm opens a branch in the U.S. to serve local clients. Over time, the branch collects more money than it needs for operations. The firm decides to bring $100,000 of surplus funds back to India. This is a classic case for using P0003, since it’s repatriating surplus income from a foreign branch.
- An Indian Company Closing Down a Foreign Branch:-
An Indian real estate company had opened a branch office in Dubai and invested ₹1 crore to set it up. Later, the company decides to close the Dubai branch. Now, it is bringing that ₹1 crore, the original capital it had invested, back to India. Since this money is not profit or income, but simply the return of the original investment from a foreign branch, it is reported under Purpose Code P0003, which is used for transactions related to foreign branches of Indian companies.
- Loss-Making Branch Offsets:-
An Indian pharmaceutical company has a branch in the UK that didn’t do well and ended up making a loss. Even though no money is brought back to India right away, the company still reports the loss and uses it to reduce its taxable profit in India. This helps lower its tax liability. Later, if the company brings any money (like profits) from the UK branch back to India, that amount will be reported under P0003, which covers income from foreign branches of Indian companies.
- NRI Using Purpose Code P0003:-
Example of Profit – Ravi, an NRI in the UK, owns an Indian IT company that set up a branch in Singapore. In 2025, the branch earned profits and sent $100,000 back to the Indian company. Since this is money repatriated from a foreign branch, it’s reported under RBI Purpose Code P0003.
Example of Loss/Liquidation – Meera, an NRI, owns an Indian company that opened a branch in South Africa. After facing losses, she closed the branch in 2025 and brought back the remaining capital to India. Since the funds came from a foreign branch, the transaction is reported under RBI Purpose Code P0003, even though no profit was made.
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