P0004 Purpose Code
According to the RBI, it is for the transactions related to “Repatriation of Indian investment abroad in subsidiaries and associates.”
P0004 is used when an Indian investor, a person or a company, brings money back to India from a foreign company they own or have invested in. This could be a subsidiary (a company they mostly own and control) or an associate (a company where they own a part and have some control). The money can come from dividends or profit shares, sale proceeds of shares, or liquidation of the foreign associate or subsidiary.
For Example:- An Indian company invests Rs. 10 crore to start a subsidiary in the U.S. to expand its business. After a few years, the U.S. subsidiary earns good profits and sends Rs. 1 crore back to the Indian parent company as dividends. This Rs. 1 crore coming into India is reported under Purpose Code P0004, because it is money received from the Indian company’s foreign investment. It shows that the Indian company is earning returns from its business abroad.
Important Rules for Repatriation
- Applicable Entity – P0004 is applicable to Indian companies, individuals living in India who have invested in a foreign company using the Liberalised Remittance Scheme (LRS), NRIs, and Indian LLPs or partnerships that have invested abroad under RBI’s ODI regulations. This code, however, does not apply to non-investment inflows like gifts or remittances.
- 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.
- Repatriation Must Be from Earnings or Capital – The money coming back must be either from the profit earned by investing in the foreign subsidiary/associate or from selling part or all of that investment. In short, the money repatriated must be linked to earnings or the original investment, not just any random transfer of funds. Failure to adhere to this rule can lead to the imposition of penalties or even a ban from FOREX trading by the RBI.
- Time Limit for Reporting Repatriation under Purpose Code P0004 – As per the RBI’s Overseas Direct Investment (ODI) guidelines, when an Indian investor (individual or company) brings money back to India from a foreign subsidiary or associate, they must report the transaction within 30 days from the date of receiving the money.
- Use of the Liberalised Remittance Scheme (LRS) – This is an important factor when using the code P0004 while bringing back returns from investments in foreign subsidiaries or associate companies. However, LRS is not directly used for repatriating funds, but is used initially to send money out of India for such investments. Under this scheme, a resident individual can remit up to $250,000 per financial year, as of 2025, without prior RBI approval, making it easier to invest in foreign entities legally and smoothly. It is to be noted that this scheme is only applicable to individual investors and not to an Indian company seeking to invest abroad.
- Rules for an NRI – An NRI can utilise the code P0004 to report repatriation of capital from a foreign associate or a subsidiary to India to the RBI, even though they are not allowed to use the LRS.
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.
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 making investments in subsidiaries and associates abroad, 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:
- Filing Foreign Tax Credit (FTC) (Section 90/91) – When an individual or a company in India brings back income like dividends, profits, or capital gains from a foreign subsidiary or associate under Purpose Code P0004, they might have already paid tax on that income abroad. To avoid double taxation, they can claim a Foreign Tax Credit (FTC) in India by filing Form 67 and showing proof of the tax paid overseas. This helps reduce their Indian tax liability on the same income.
How DTAA Plays a Role – 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 avail of these benefits, you must obtain a Tax Residency Certificate (TRC) from the foreign country and submit it along with Form 10F to the Indian tax authorities. To learn more about the countries with which India has DTAA, click here.
- Tax Exemption for Long-Term Capital Gains (LTCG) – If an investor sells a share that they have held for 2 to 3 years, the profit made is considered a long-term capital gain (LTCG). This type of gain is usually taxed at a lower rate, and in some cases, it may even be completely tax-free. The rate of exemption is different for individuals and companies. Let us have a look at it –
LTCG Tax Rates for Individuals – This has 3 taxation rules –
– If the investor holds the investment for more than 2 years in listed foreign securities, then their gains are taxed at 20 per cent and they also get indexation benefits, which is a taxation method that adjusts an asset’s purchase price for inflation, resulting in a lower tax burden.
– If the investor holds the investment for more than 2 years in unlisted foreign securities, then their gains will be taxed at 10 per cent without indexation. This is applicable if gains exceed Rs. 1 lakh; applicable only in some cases.
– If the total taxable income (including LTCG) is below Rs. 7 lakh, an individual may get a rebate under Section 87A, reducing tax liability to zero.
LTCG Tax Rules for Companies – This has 2 taxation rules –
– For companies, the LTCG is added to their regular income and taxed at the corporate tax rate; however, they can apply for a 22% tax rebate (mentioned under Article 115BAA). For this, the domestic company cannot claim most tax deductions or exemptions, such as those for additional depreciation, R&D expenses, SEZ benefits, or tax holidays. In simple words, if other tax benefits are sought, then the company does not get the 22% rebate in the overall tax and vice versa. Once the company opts for this 22% rate, the choice cannot be changed or withdrawn in future years.
– Companies do not get indexation benefits like individuals. However, if India has a tax treaty (DTAA) with the other country, the tax can sometimes be lower or avoided altogether.
- No Profit, No Tax – If an investor decides to sell all their share as they were not able to earn profits and repatriate the original invested capital to India, then there will be no tax levied on the capital. However, it must be noted that to claim this benefit, the investor must file an annual ITR to keep the RBI and the AD Bank informed of the performance of the associate or the subsidiary in which the investor has purchased shares.
- 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).
Capital Loss Set-Off Example – An Indian investor owns shares in a foreign subsidiary and sells them at a loss. For example, the investor put in Rs. 20 lakh in 2018 and sold the shares in 2024 for Rs. 12 lakh, resulting in a capital loss of Rs. 8 lakh. In the same year, they earned a capital gain of Rs. 10 lakh by selling property in India. The investor can set off the Rs. 8 lakh capital loss against the Rs. 10 lakh gain and will pay tax only on the remaining Rs. 2 lakh.
Capital Loss Carry Forward Example – An Indian investor owns shares in a foreign subsidiary and sells them at a loss. For instance, the investor invested Rs. 20 lakh in 2018 and sold the shares in 2024 for Rs. 12 lakh, leading to a capital loss of Rs. 8 lakh. In 2024, the investor didn’t have any capital gains to adjust this loss. Instead of losing the tax benefit, they can carry forward the Rs. 8 lakh loss for up to eight assessment years. If they earn any capital gains in the future, they can use this carried-forward loss to reduce their taxable income and save on taxes.
- Exemption under Section 115F – Under Purpose Code P0004, if a Non-Resident Indian (NRI) or an individual earns long-term capital gains by selling their investment in a foreign subsidiary or associate, they can claim an exemption under Section 115F of the Income Tax Act. This exemption applies if the investor reinvests the entire or part of the sale proceeds into specified assets in India, such as shares or debentures of an Indian company, within six months from the date of sale. If the full amount is reinvested, the entire capital gain is tax-free. If only a part is reinvested, the exemption is allowed in proportion to the amount reinvested. This benefit helps NRIs and individuals reduce their tax liability when repatriating money back to India through legitimate reinvestment.
- Exemption under Section 54F – It helps individual taxpayers and Hindu Undivided Families (HUFs) save tax on capital gains made from selling shares or units of an associate or a subsidiary. If the money earned is used to buy a residential house in India, they can get a tax exemption. To claim this, the investor should have only one house (excluding the new one they are buying). The new house should be bought within one year before or two years after the sale of the shares. If the house is under construction, the investor has up to three years from the sale date to complete it. This tax benefit is available only to individuals and HUFs, not to companies.
P0004 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0004 would be used to report transactions in India:-
- Bringing Dividend from a Foreign Subsidiary:-
An Indian investor, whether a company or an individual, owns most of a U.S.-based subsidiary. During the year, the subsidiary pays Rs. 50 lakh as a dividend to the Indian company. This is foreign income and must be reported under P0004. The dividend is taxable in India, but the company may get tax credit if tax was already paid in the U.S. under the DTAA.
- Sale of Stake in Foreign Subsidiary:-
An Indian investor sells its stake in a Russian-based subsidiary and earns Rs. 1 crore from the sale. This amount is considered foreign income and should be reported under P0004. The profit made from the sale is taxable in India as capital gains. However, if any tax was paid in the Russian Federation, the company may claim relief under the DTAA/FTC to avoid double taxation.
- Return of Capital from Associate:-
An Indian company owns 30% of a UK-based associate company. During the financial year, the UK company returns Rs. 20 lakh to the Indian company. This is not a dividend or profit, but simply a part of the original investment being returned. Since it’s a return of capital, not income, it must still be reported under P0004, but it is not taxable in India, as it’s just the repayment of the money the Indian company had earlier invested.
- Interest from Loan Given to Foreign Associate:-
An Indian individual/company gives a loan to its associate company in the UK. During the year, the UK company pays Rs. 10 lakh as interest on the loan. This interest is foreign income for the Indian company and must be reported under P0004. The interest amount is taxable in India, but the company may get relief if tax was already deducted in the UK under the DTAA.
- Repatriation of Capital after Liquidation of Foreign Subsidiary:-
An Indian company had a subsidiary in the UK, which was shut down. After liquidation, the remaining funds of Rs. 1 crore were sent back to the Indian parent company. This repatriated amount is treated as foreign income and must be reported under P0004. If part of this amount includes capital gains, it may be taxable in India, but the company can claim relief under various tax exemption rules.
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