Purpose Code S1405 - Interest paid by banks on their own account

The S1405 purpose code is for interest that Indian banks pay on their own account, such as to vostro account holders or on overdrafts in their nostro accounts abroad. See who uses it and how it differs from S1402 and S1403 for this outward remittance.

The S1405 purpose code is used when an Indian bank pays interest abroad on its own account, not for a customer. The RBI description is "remittance towards interest payment by ADs on their own account (to VOSTRO a/c holders or the OD on NOSTRO a/c.)". AD means authorised dealer, a bank licensed to handle foreign exchange. Two account terms explain it. A nostro account is an Indian bank's account held with a foreign bank abroad. A vostro account is a foreign bank's account held with an Indian bank. Interest can be due on both. It is a current account transaction in the primary income group. Businesses and individuals never select this code; it only appears in a bank's own reporting.

This Purpose Code should be used only where the transaction fits its defined regulatory scope. Here's when you should and shouldn't use this code:

You should use this code when:

• Nostro overdraft interest - Interest charged by a foreign bank when the Indian bank's nostro account runs into overdraft.
• Vostro balance interest - Interest the Indian bank pays a foreign bank on balances in that bank's vostro account, where interest is agreed.
• Interbank borrowing interest - Interest on short-term lines or borrowings the bank took from foreign banks on its own account.
• Head office and branch lines - Interest on funding lines between a bank and its overseas correspondents, where booked on its own account.

Do not use this code when:

• The bank is paying interest to NRI depositors (use S1402 instead).
• The bank is repaying the principal of its own foreign loans or overdrafts (use S0015 instead).
• A customer pays interest on a buyer's credit or other foreign loan (use S1403 instead).
• The bank is paying fees or charges to a correspondent bank (use S0701 instead).

RBI purpose codes are mandatory under FEMA to classify the nature of cross-border transactions entering or leaving India. They allow banks and regulators to accurately track foreign exchange flows and apply the correct regulatory, tax, and reporting treatment.

For individuals, businesses and institutions, correct purpose code usage:

• Ensures transactions are classified correctly under FEMA.
• Enables accurate reporting to the RBI and other regulators.
• Reduces delays caused by compliance checks or misclassification.
• Supports clean audit trails and tax reconciliation.

Bottom-line:

Using the correct purpose code helps ensure smooth processing, regulatory compliance, and faster credit of funds.

1. The bank's treasury or correspondent banking team confirms the interest due from the nostro statement or vostro agreement.
2. Tax on the interest is worked out, with any TDS deducted where the interest is taxable in India.
3. The payment is booked and reported as "S1405 – Remittance towards interest payment by ADs on their own account".
4. The bank settles the amount through its correspondent account and records it in RBI returns.

Additional Notes:

• This is internal bank reporting. A business customer should never see S1405 on its own remittance form.
• Whether TDS applies to interest paid to a foreign bank depends on Indian tax law and the treaty with that bank's country.
• Keep nostro overdraft interest separate from principal, which is reported under S0015.

• Using a generic or incorrect purpose code instead of the exact RBI-prescribed purpose code can lead to misclassification of the transaction under FEMA and trigger additional compliance checks by the bank.
• Mismatch between purpose code, invoice, and remittance narration may place the transaction on hold until clarification is provided.
• Submitting unclear or incomplete supporting documents that do not clearly describe the nature of the transaction often result in delays, as banks rely on documentation to validate FEMA compliance.
• Missing mandatory PAN or incomplete KYC documentation can prevent banks from releasing funds until verification is completed.
• Using service-related purpose codes for non-service transactions like capital receipts, investments, gifts, or refunds can result in incorrect regulatory treatment and potential reporting issues.
• Assuming small or recurring transactions do not require accuracy and repeated misclassification can attract regulatory scrutiny over time.

Cross-border payments require accurate purpose code selection and complete compliance documentation. Xflow helps businesses and individuals receive international payments while staying aligned with RBI and FEMA requirements.

With Xflow, you can:

• Select the correct purpose code with clarity
• Organize and maintain supporting documents
• Reduce compliance back-and-forth with banks
• Support FEMA compliant inward remittances