Compliance Guideline for Inward Remittance: Things to Note

A well-developed inward remittance infrastructure is essential for India’s economic growth. It makes it easy for exporters to earn foreign exchange and individuals to receive money from their family members abroad. 

But the infrastructure must be secure and prevent attacks from harmful money laundering and illegal activities like terrorism financing. The Reserve Bank of India (RBI) takes up that responsibility. It actively monitors foreign exchange transactions in India and establishes guidelines to safeguard the economy from such threats. 

This blog post dives deep into the RBI guidelines and uncovers its effect on personal and business international remittances.

What are the RBI and FEMA guidelines for inward remittance in India?

Before we head to the FEMA guidelines here is a primer on FEMA. FEMA is an abbreviation for the Foreign Exchange Management Act passed in the parliament in 1999.

The FEMA oversees cross-border payments in India and sets up guidelines for foreign trade. The RBI implements these guidelines and establishes the legal framework for all businesses and individuals engaged in foreign trade and services. 

Here is the list of FEMA guidelines that cover the most important aspects of compliance in inward remittance in India:

Authorized Dealers

Only specific financial institutions are authorised by RBI u/s 10 (1) of FEMA., 1999 to deal in foreign inward remittances and are referred to as Authorized Dealer Category I (AD Cat I) banks. 

These banks buy and sell foreign currency to facilitate international transactions. They also oversee and report all inward remittances to RBI through the Export Data Processing and Monitoring System (EDPMS). 

Foreign Inward Remittance Certificate (FIRC)

FIRC is the proof of inward remittance. It’s a necessary document for exporters, Indian companies offering services outside India, and freelancers to prove that they have received money from an international client. The FIRC contains details about the remitter, amount, and purpose of remittance among other crucial information. FIRC is more important for exporters because it’s useful for claiming export-related incentives and GST refunds.

Purpose Codes

Purpose codes define the purpose of the remittance. You will find the purpose code list on the RBI website to identify the purpose of your transaction. After you have identified that, mention the purpose code to your bank. 

You must be careful when you mention the purpose code to your bank. Incorrect information could result in compliance issues resulting in the cancellation of the transaction or legal actions in the worst case scenario. For example, if you’re an exporter of goods and entered into an agreement with the buyer to receive the full invoice value after they receive the shipment, then the purpose code for you is P0102. If you use P0103 which is applicable for exporters receiving advance payments, your payment could be denied. 

What are the Documents Required for Inward Remittance in India?

The list of documents depends on the nature of the transaction. For example, the document list for an individual receiving money from a family member in a foreign country will be different from an exporter. We have listed all the documents for each category:

Receiving payment for personal purpose

Identification proof: Any government-issued document that proves you’re a citizen of the country falls in this category. So your Passport, Aadhar Card and Voter ID will qualify. 

Bank account details: Your bank name, account number, branch location, and IFSC code are the three most important information you must share with the remitter to receive foreign inward remittance

Purpose code: Check on the RBI purpose code list to find the most appropriate purpose code. There are different codes based on the purpose behind the personal transfer. For example, if you’re receiving the money for family maintenance and savings, then P1301 is the right code. You can find the right purpose code for your business right here. 

Receiving payment for business transactions

This not only applies to exporters but also freelancers and consultants who receive cross-border payments

Foreign Inward Remittance Certificate (FIRC): Once the payment reaches your bank account, you’ll need to request an FIRC from your bank to confirm receipt of funds. This usually involves a fee of around INR 400, and you can expect to wait at least a week before the FIRC is issued. However, platforms like Skydo provide free online FIRC for every transaction instantly. 

Invoice: The invoice should clearly mention the nature of the transaction like the item details in case you export goods.

Contract: Your bank might ask you to produce a copy of the agreement to understand your business relations with the international client.

Purpose code: The purpose code is essential because it defines the reason for payment. Double-check the purpose code before you share it with your bank to avoid hassles like cancellations or reversals.

KYC: If you’re an export organization, the Certificate of Incorporation, Memorandum, and Articles of Association are the most important KYC documents.

Bank account details:  Your bank name, account number, branch details, and IFSC code will come under this category

Declaration form: Banks demand a declaration form during large transactions. You must submit an undertaking to the bank that the money is from a legitimate source and that you’re not involved in any illegal activities. This is done to increase transparency in transactions and track foreign funds.

Do you have to pay tax on Remittance?

Generally, there is no tax liability on foreign inward remittances in India. However, there are exceptions you should be mindful of to adhere to tax compliance laws:

Gifts: If the value of personal gifts from non-relatives exceeds INR 50,000 in a financial year, then you will be taxed as per the provisions mentioned u/s 56 (2) (x) of the Income Tax Act. 

Foreign income: Foreign income in the form of salary or business proceeds will be taxed according to your income tax slab rate. 

Income from investments: Any form of income you generate from foreign investments will also be taxed according to your income tax slab rate

GST: There is no GST on foreign exchange. However, payment platforms may charge 18% as a transaction fee for receiving inward remittances. 

What income sources are Prohibited in the Inward remittance RBI guidelines?

Inward remittance from the following sources is strictly prohibited under the FEMA guidelines:

Online gaming: Any income generated from online gaming websites, betting or gambling platforms cannot be remitted to India. 

Other speculative or illegal activities: This broad category covers all forms of income generated through illegal activities like drug trafficking. 

Lottery winnings: If a lottery is a source of income, you cannot remit the funds to India. This is so because it’s difficult to track the source of the lottery and could be associated with money laundering.

Winning from races or riding: Income generated from betting on races is treated as income from gambling activities. Therefore it is banned from inward remittance transactions.

Earnings from banned magazines: Banned magazines promote violence and hatred towards communities or some other form of illegal content. Allowing income from such sources to enter the country could be a threat to cultural stability.

Sweepstakes: Sweepstakes are like lotteries and could be traced back to illegal marketing schemes. Preventing them means preventing unlawful income through inward remittance. 

Restrictions on Inward Remittance

There are two methods to receive foreign inward remittances in India – Rupee Drawing Arrangement (RDA) and Money Transfer Service Scheme (MTSS)

However, to use these methods they have to go through the AD-Cat I banks and cannot do it on their own.

Where to Show Receipt of Foreign Remittance While Filing ITR?

If you’re earning foreign income as a salary from working remotely with an international company, you can report it as 'income from salary' in your ITR. For freelance income, you may choose the presumptive taxation scheme and file ITR 4, or classify it as 'income from business or profession.' However, if you hold foreign assets or receive capital income from abroad—such as dividends, interest, or capital gains—you’ll need to declare these under Schedule FA in ITR 2 or 3. 

 Receive 100 % safe and compliant International Payments with Skydo

Banks may be the most common way to receive inward remittances, but they’re far from the best. Slow processes, hidden fees, and unclear final amounts mean you’re often left waiting—and wondering—about how much will actually arrive in your account.

Exploring alternative options, like international virtual accounts, can make a big difference. Virtual accounts offer three major benefits: they keep your bank details private, speed up the transfer process, and eliminate hefty SWIFT fees. Platforms like Skydo provide a streamlined experience with flat fees and immediate FIRC issuance as soon as funds arrive. By choosing a smarter remittance solution, you can save time, cut costs, and stay in control of your money.