How to report inward remittance in India: A step-by-step guide for businesses

Receiving money from abroad? Here's everything you need to know about how businesses should report inward remittance. We’ll discuss the types and regulations, documentation, tax on inward remittances to India, and how to stay audit-ready.

Inward remittance refers to the process of receiving funds in India by an individual or entity located outside India. For businesses, such remittances are for exports, services rendered, investments, reimbursements, or inter-company loans.

These are the main types of inward remittance a company can receive:

1. Payment for Goods and Services

This is the most common form for exporters and service providers. For example, a design firm in Mumbai receives $5,000 from a client based in London for completing a branding assignment. That is an inward remittance.

2. Foreign Direct Investment (FDI)

Funds invested by an Indian entity from a non-resident investor, often in exchange for equity shares, also come under inward remittance. For example, an American angel investor invests $50,000 in an Indian IT venture.

3. Loans and Borrowings

Loans and other borrowings received from another country, either from a financial institution or as a related party transaction, are considered as inward remittances. For example, an Indian subsidiary receives a working capital loan from a parent company in Germany.

4. Dividends

If a foreign company declares dividends, the payment qualifies as an inward remittance. For example, an Indian investor gets dividend payments from a foreign company they've invested in.

5. Royalties and License Fees

If you receive royalty or license fees in India, then that is also considered an inward remittance. For example, a media firm gets royalty payments from foreign streaming partners.

6. Interest Income

Interest received on foreign bonds, loans given, or fixed deposits held abroad is also a type of inward remittance. For example, your Indian company earns interest on a deposit placed in a US bank account, which is then repatriated.

7. Refunds and Reimbursements

Clients may reimburse pre-approved travel, marketing, or logistics costs incurred on their behalf. These payments are inward remittances. For example, you pay for a hotel in Singapore for your client’s employee during a project, and the client reimburses the expense.

This list is not exhaustive; numerous other transactions can qualify as inward remittances. Every type of inward remittance has a specific reporting requirement and an associated tax on inward remittances to India. Understanding them is the key to hassle-free compliance.

Inward remittances are tightly regulated, and you’re operating within a multi-layered regulatory ecosystem. These regulations ensure funds aren’t linked to illegal activities, tax evasion, or violations of foreign exchange control norms. Here are the central regulatory bodies in charge:

• Reserve Bank of India (RBI): RBI is India’s apex foreign exchange regulator, governing all foreign exchange transactions under FEMA (Foreign Exchange Management Act, 1999).
• Income Tax Department (India): The income tax department primarily monitors the company and foreign taxation systems. Its main focus is on whether inward remittance is taxable or not.
• Ministry of Finance / Domestic Tax Authorities: When you export goods/services and claim GST refunds or benefits, these authorities verify certain information to monitor company and foreign taxation systems.

These authorities can request reporting of documentation, evidence, or a certificate, under defined regulations, particularly if the inward remittance is huge or is for a class like FDI or intercompany transactions.

Companies need robust documentation to report inward remittances, which is the foundation of transparency. Here are some of the primary documents that you should have sorted out:

Example:

If you’re a SaaS company selling a $15,000 annual software license, you’d need an invoice with purpose code (P0802), eFIRA, bank advice, and GST export LUT (if required).

Pro-tip: On Xflow, eFIRA/FIRC documents auto-create in 24 hours. There is no need to follow up or wait for a "relationship manager" to respond or help solve your query.

When you're reporting inward remittances, you'd want to make sure that you're doing it the right way because any errors in the reporting process can affect your accounts and vice versa. So, here’s how to report inward remittance in India:

1. Receive the Funds: The first step is to ensure the remittance is credited via proper banking channels. Funds typically arrive via SWIFT, IMPS, or RTGS.
2. Inform the Bank: Then, submit invoice and declaration forms (especially for first-time remitters) to the bank. Make sure that you declare the purpose code that fits the nature of the transaction.
3. Get Your eFIRA: The bank will issue an eFIRA certificate that officially records the inward remittance. This is your proof for auditors, IT, and GST authorities.
4. GST Filing (If Applicable): If GST is applicable, then mention that in your invoice under GSTR-1 and match payment in GSTR-3B. For exports, ensure the GST LUT is valid.
5. Income Tax Reporting: In the next step, you need to record income tax on your accounts as per their nature under Revenue (P&L), Capital (Balance Sheet), or Other Income. Evaluate the tax on inward remittances to India; don’t assume everything is exempt.

Reconciliation: The final step is to match your ledger entries with eFIRA, SWIFT messages, and tax filings. This is critical for refund claims, audits, and due diligence.

• GST returns: GST returns must be filed monthly or quarterly, depending on the size, registration category, and type of the business.
• TDS: Tax Deducted at Source (TDS) payments must be deposited monthly or quarterly, depending on the registration. Further, the corresponding quarterly returns should be filed in Form 26Q.
• RBI filings: For investment-related remittances, filings with the Reserve Bank of India (RBI) must be completed within 30 days of receiving the funds.
• Income tax: Income tax on inward remittances should be reported annually as part of the company’s income tax return.
• FIRC/eFIRA – The Foreign Inward Remittance Certificate (FIRC) or its electronic version (eFIRA) should be obtained within 30 days of the remittance.
• FLA Return – The Foreign Liabilities and Assets (FLA) Return must be filed by July 15 of each financial year.

Each incoming payment holds multiple layers of reporting, regulatory filings, and possible audits by tax officials, auditors, or banks. Hence, your documents need to be up to date. Here are some reasons why you should always maintain accurate records:

1. Audit Readiness

Proper documentation keeps your accounts and compliance in good health for audits. Invoice variance, purpose codes, or FIRC details variance will attract clearance delays and suspicion.

2. GST Refunds & Export Incentives

To get a GST refund or avail government benefits for services sold overseas, you should make sure that all your records are in order and that there’s no discrepancy.

3. Reconciliation to Bank Statements

Proper accounts allow finance teams to reconcile forex receipts, invoices, and ledger postings in a timely and accurate manner.

4. Accuracy in Tax Filings

When you have your documents in order, you can classify them based on whether they're taxable or non-taxable. You'll not have to worry about non-overpayment or tax on inward remittances to India.

Tip: Xflow auto-generates and stores eFIRA and payment history, reducing your dependency on manual interventions.

Ignoring or disregarding compliance with inward remittance rules and regulations is very high risk and can directly affect your business continuity and reputation.

1. FEMA Violations

Not declaring foreign exchange is a direct violation of FEMA rules. Fines can be three times the amount involved in such contravention or 2 lakhs, whichever is lower. RBI and the Enforcement Directorate (ED) have made enforcement stricter against faulty foreign transactions.

2. Tax Liability Clarity

Misclassification of foreign investment income could lead you to pay the incorrect tax on inward remittances to India. Erroneous treatment can also lead to TDS mismatches or transfer pricing risk.

3. Bank Rejection or Freezing of Funds

Banks mostly reject or withhold remittance credits in case of missing or wrong documentation or purpose codes. In India, this happens often with businesses, and their money gets stuck "on hold" for long periods for FIRC clarification.

4. Investor Confidence and Due Diligence

Startups getting VC funding from abroad have to file FC-GPR on time. Not doing so can impact your credibility among investors during the due diligence phase.

5. Disruption in Operations

Faults in reporting can result in delays in receiving funds, accounting variations, and impact cash flow planning.

Inward remittance is treated differently under different criteria in your accounts and tax filings. Here’s how you should treat inward remittances in your books:

• Income: Under Income, revenue from services or products goes under operating income, and license fees and royalties usually fall under other operating income.
• Capital: Under Capital, you must record and report foreign direct investments (FDI) and loans under equity or liability based on the structure.
• Loans: Loans should be classified separately and reconciled periodically with your accounts and tax filings.

Example:

• Invoice: $5,000 @ ₹83 = ₹4,15,000
• Remitted: $5,000 @ ₹84 = ₹4,20,000
• FX gain = ₹5,000

Foreign Exchange Gains/Losses:

If you invoice in USD and receive INR after conversion, then forex gains will come under “Other Income”, and Forex losses will come under “Other Expenses”

Impact on Financials:

Accurate classification ensures your profit and loss statement reflects actual earnings. Moreover, it will be a lot simpler for you to manage financials during statutory audits and transfer pricing assessments. Proper classification also impacts net worth, EBITDA, and taxation.

Whether or not you'll have to pay tax on inward remittances to India depends on the purpose of the transaction.

• The remittances on income (service or goods) are taxed as business income on your tax filings.
• Remittances of capital (investment or lending): Remittances of capital are not taxed when received but are accounted for under RBI/FEMA guidelines.

What do you pay in tax on inward remittances to India?

• Freelancers or service providers: Remittance is to be included under business income, and income tax is paid accordingly.
• Royalties or license fees: Withholding tax (TDS) applies to royalties and license fees and varies depending on the payment amount.
• External loans: On external loans, the interest of the loan is taxable, and the TDS is also applied under Section 195.

Transfer Pricing

If you're an organization with operations in multiple countries, charging services and financing must be on an arm's length basis. You need transfer pricing documentation to support your pricing policy.

Tip: Use professional support or tools like Xflow to monitor documentation on every dollar collected. You'll save a lot of time during tax season.

There are certain challenges that Indian businesses have to face during the inward remittance process. Here is what typically happens and how it can be corrected:

1. Delayed or Manual Issuance of FIRC

The most common challenges businesses face in inward remittance are that banks often take weeks to issue FIRCs and need manual reminders.

Solution: You can use Xflow, which automatically generates eFIRA within 24 hours, completely digital and bank-approved.

2. Incorrect Purpose Codes

Using the wrong RBI code (e.g., P0805 instead of P0802) can affect tax classification or cause fund rejection.

Solution: Refer to the RBI's purpose code directory or rely on platforms like Xflow that recommend codes based on invoice details.

3. Foreign Exchange Variance

Exchange rate fluctuations between the invoice and receipt dates lead to FX gains/losses that must be appropriately recorded.

Solution: Use real-time FX platforms or hedge large transactions to reduce volatility impact and stay on the safer side.

4. Compliance Fatigue

Smaller finance teams can struggle to stay in sync with RBI filings, tax reporting, and bank KYC renewals.

Solution: Automate the reporting through software or hire a forex/tax specialist for large-value transfers.

5. Tax Misclassification

Misunderstanding what constitutes income versus capital inflow can result in overpayment or underpayment of tax on inward remittances to India.

Solution: Keep proper documentation and take the advice of tax professionals to classify and report accordingly.