Cross-Border Payments Advisory for India-Linked Transactions

Introduction: Cross-Border Payments and India's Regulatory Framework

India does not operate an open capital account. Every rupee flowing into or out of the country passes through a regulated gateway — the Authorized Dealer (AD) bank — and must comply with the Foreign Exchange Management Act, 1999 (FEMA), RBI master directions, and the Income Tax Act's withholding provisions. This regulatory structure means that cross-border payments to and from India require more documentation, more compliance steps, and more regulatory awareness than in most other major economies.

For foreign companies with Indian operations, this creates a continuous compliance obligation. The Indian subsidiary makes payments to the parent company (management fees, royalties, dividends, loan interest), receives capital infusions, settles trade invoices with overseas vendors, and processes salary payments for expatriate employees. Each payment type has its own FEMA classification, purpose code, withholding tax treatment, and documentation requirements. Getting any element wrong — even on a routine monthly payment — creates a compliance exposure that compounds over time.

This guide covers the complete framework for cross-border payments involving India: the FEMA regulatory structure, inward and outward remittance procedures, Form 15CA/15CB compliance, RBI purpose codes, withholding tax on cross-border payments, DTAA optimization, the ECB framework for intercompany loans, trade credit regulations, and the Liberalised Remittance Scheme (LRS) for individual remittances.

FEMA Framework for Inward and Outward Remittances

Current Account vs Capital Account Transactions

FEMA classifies all cross-border transactions into two categories:

• Current account transactions — payments for trade in goods and services, interest payments, dividends, management fees, royalties, travel expenses, and other recurring operational payments. These are generally permitted without prior RBI approval under the automatic route, subject to certain restrictions listed in the FEMA (Current Account Transactions) Rules, 2000
• Capital account transactions — equity investments (both inward FDI and outward ODI), loans (ECBs and trade credits), share transfers between residents and non-residents, and guarantees. These are more strictly regulated, with specific rules governing amounts, pricing, reporting, and end-use

The practical distinction matters because capital account transactions typically require specific RBI reporting (FC-GPR, FC-TRS, ECB-2) within defined timelines, while current account transactions require proper documentation and purpose codes but not event-specific RBI reports.

Role of the Authorized Dealer Bank

All cross-border payments must be processed through an AD Category-I bank — a bank licensed by the RBI to deal in foreign exchange. Major Indian banks (SBI, HDFC, ICICI, Axis, Kotak) and Indian branches of international banks (Citibank, HSBC, Standard Chartered, Deutsche Bank) are AD Cat-I banks. The AD bank:

• Verifies the legitimacy and documentation of each transaction
• Assigns and reports the correct purpose code to the RBI via FETERS
• Issues Foreign Inward Remittance Certificates (FIRC) for incoming payments
• Submits FEMA forms (FC-GPR, FC-TRS) to the RBI on behalf of the company
• Ensures compliance with RBI master directions before processing
• Reports all forex transactions to the RBI

Form 15CA and Form 15CB: The Outward Remittance Compliance

Section 195(6) of the Income Tax Act, read with Rule 37BB, requires that every person making an outward remittance to a non-resident must furnish information in Form 15CA to the Income Tax Department. The form has four parts:

Form 15CB is a certificate from a practicing Chartered Accountant that verifies: the nature of the remittance, the applicable tax rate (domestic or DTAA), the TDS amount deducted, the DTAA provisions relied upon (if treaty rate is applied), and the recipient's TRC and Form 10F details. The 15CB must be uploaded on the Income Tax e-filing portal before the corresponding 15CA can be filed. The 15CA acknowledgement number is then provided to the AD bank, which will not process the remittance without it.

RBI Purpose Codes for Cross-Border Transactions

Every cross-border remittance reported by the AD bank must carry a purpose code from the RBI's FETERS code list. Key purpose codes relevant to foreign subsidiaries include:

Inward Remittance Purpose Codes (P-codes)

Outward Remittance Purpose Codes (S-codes)

Using the correct purpose code is not optional — it is a regulatory requirement. Incorrect purpose codes create permanent mismatches in the RBI's foreign exchange transaction database and can trigger compliance queries during FEMA inspections.

Withholding Tax on Cross-Border Payments

Section 195: TDS on Payments to Non-Residents

Section 195 of the Income Tax Act mandates that any person making a payment to a non-resident that is chargeable to tax in India must deduct tax at source at the applicable rate. The key payment types and their tax treatment are:

Royalties (Section 115A)

Royalties paid to non-residents for the use of patents, trademarks, copyrights, or other intellectual property are taxed at 20% plus applicable surcharge and 4% health and education cess (effective rate approximately 21.84% for company recipients). This rate was increased from 10% to 20% by the Finance Act 2023 (effective April 1, 2023). Under most DTAAs, the treaty rate is lower — typically 10–15% — making treaty benefit claims essential for royalty payments.

Fees for Technical Services (Section 115A)

FTS — payments for managerial, technical, or consultancy services — attract the same 20% domestic rate as royalties. The critical nuance is the definition of FTS under DTAAs: many of India's treaties include a 'make available' clause, which means the payment is FTS only if the service makes available technical knowledge or skill to the payer. If the service does not 'make available' technical knowledge (e.g., pure management oversight), it may be classified as business income rather than FTS — and business income is taxable only if the non-resident has a PE in India.

Interest (Section 115A)

Interest paid on ECBs or other loans to non-residents is subject to withholding at 20% plus surcharge/cess under domestic law. However, concessional rates may apply: interest on ECBs in foreign currency to non-resident lenders (not being a PE in India) was historically taxed at 5% under Section 194LC, though this provision has specific conditions and sunset clauses. DTAA rates for interest typically range from 10% to 15%.

Dividends

Following the abolition of Dividend Distribution Tax (DDT) in 2020, dividends paid by Indian companies to non-resident shareholders are subject to withholding tax at 20% plus surcharge/cess under domestic law. DTAA rates vary significantly: the India-Singapore DTAA provides 15% (10% if the parent holds 25% or more equity), the India-US DTAA provides 25% (15% if the parent holds 10% or more), and the India-UAE DTAA provides 10%. Given these rate differences, choosing the right treaty and maintaining proper documentation is critical for dividend repatriation efficiency.

DTAA Rate vs Domestic Rate

The payer must apply the rate that is more beneficial to the non-resident — either the domestic rate or the DTAA rate. Since the 2023 increase in domestic rates on royalties and FTS, the DTAA rate is almost always lower for these payment types. To claim the DTAA rate, the non-resident must provide a valid Tax Residency Certificate (TRC) and Form 10F. Without these documents, the domestic rate must be applied regardless of the DTAA.

ECB Framework for Intercompany Loans

When a foreign parent company lends money to its Indian subsidiary, the loan is classified as an External Commercial Borrowing under FEMA. The ECB framework, governed by RBI's Master Direction on ECBs, prescribes:

Eligible Borrowers and Lenders

Indian companies, LLPs, and certain other entities can borrow under ECB. For intercompany loans, the foreign lender must be a recognized lender — which includes a foreign equity holder holding at least 25% direct equity (or 51% indirect equity through a group structure). RBI's February 2026 amendments have further broadened lender eligibility to include group companies with a common overseas parent.

Borrowing Limits

Under the automatic route, ECBs up to the higher of USD 1 billion or 300% of net worth per financial year are permitted (revised from the previous USD 750 million limit by RBI's February 2026 amendments). Beyond these limits, prior RBI approval is required under the approval route.

Minimum Average Maturity (MAM)

ECBs must have a minimum average maturity of 3 years for borrowings up to USD 50 million, and 5 years for borrowings above USD 50 million (with certain exceptions for specific sectors).

All-in-Cost

Historically, the all-in-cost was capped at 450 basis points over the benchmark rate (SOFR for USD-denominated ECBs). RBI's February 2026 amendments have removed this fixed ceiling, requiring instead that costs align with prevailing market conditions — a significant liberalization.

End-Use Restrictions

ECB proceeds cannot be used for: investment in real estate (other than affordable housing), investment in capital markets, equity investment (including into Indian companies), on-lending to other entities, payment of dividends, or repayment of existing rupee loans (with certain exceptions). General corporate purposes are permitted for investment-grade borrowers.

Reporting Requirements

The borrower must: obtain a Loan Registration Number (LRN) from the RBI before the first drawing, file monthly ECB-2 returns through the AD bank reporting actual transactions, and report the ECB in the annual FLA return. Non-compliance with any ECB condition — including end-use restrictions — can result in FEMA compounding proceedings.

Trade Credit Regulations

Trade credits extended by overseas suppliers for import of goods and services are regulated separately from ECBs. Key provisions:

• Trade credit for goods imports: up to USD 50 million per transaction under automatic route, with maturity up to 1 year for non-capital goods and up to 3 years for capital goods
• Trade credit for service imports: permitted with maturity not exceeding the contractual timeline for service delivery
• Interest on trade credit: must not exceed benchmarks prescribed by RBI
• Reporting: through the AD bank at the time of import documentation
• Extension of maturity: requires RBI approval if the original maturity cannot be met

RBI's November 2025 Trade Relief Measures extended the realization period for export proceeds from 9 months to 15 months, providing additional flexibility for exporters.

Netting and Pooling Restrictions

India's FEMA framework does not permit:

• Notional cash pooling — combining credit and debit balances across accounts of group entities without actual movement of funds. This is not permitted in India
• Multilateral netting — offsetting amounts owed between multiple group entities across borders. Each cross-border transaction must be settled individually through the AD bank
• Zero-balance pooling — sweeping balances to an overseas master account. Transfers from Indian accounts to overseas accounts must comply with FEMA's current/capital account classification

These restrictions mean that multinational groups cannot implement their standard global treasury management structures in India. Each cross-border payment between the Indian entity and any overseas entity must be processed as a separate AD bank transaction with its own purpose code, documentation, and 15CA/15CB compliance (where applicable). This is one of the most significant operational differences foreign companies encounter when operating in India.

Foreign-Specific Considerations

Repatriation Planning

Foreign investors have several mechanisms to extract returns from their Indian operations, each with different regulatory and tax implications:

PE Risk from Cross-Border Payments

Indian tax authorities actively examine cross-border payment patterns for evidence of a Permanent Establishment. Large management fee payments may suggest that the foreign parent is effectively managing Indian operations. Service agreements where parent company employees direct Indian staff activities can create a service PE. And if the Indian subsidiary habitually concludes contracts on behalf of the parent, an agency PE may exist. Cross-border payment structuring must consider PE implications.

Home-Country Tax Credits

Withholding tax deducted in India is typically available as a foreign tax credit in the parent's home country — under the applicable DTAA and the parent's domestic foreign tax credit rules. However, if excess tax is withheld in India (e.g., because the domestic rate was applied instead of the lower DTAA rate), the parent may not be able to claim full credit in their home jurisdiction. Correct withholding at the DTAA rate prevents this tax leakage.

Common Mistakes to Avoid

• Making outward remittances without Form 15CA/15CB — This is the most common compliance failure. Most AD banks will block the transaction, but some may process it if the documentation is submitted immediately afterward. The safest approach is to complete 15CA/15CB before initiating the remittance
• Applying the domestic withholding rate without checking the DTAA — Since the domestic rate on royalties and FTS is now 20%, failing to apply the lower DTAA rate results in significant over-deduction, locking up cash that the non-resident must then claim as a refund through an Indian tax return
• Using incorrect or generic purpose codes — Each payment type has a specific purpose code. Using a generic code (like 'miscellaneous') creates reporting inaccuracies that the RBI tracks
• Not obtaining TRC and Form 10F from the non-resident before the payment — DTAA benefits cannot be claimed without these documents. They should be obtained at the beginning of each financial year and maintained on file
• Ignoring reverse charge GST on import of services — When the Indian subsidiary pays for services received from the foreign parent, GST is payable by the Indian entity under reverse charge mechanism. This is frequently missed, especially on management fee payments
• Treating intercompany loans as simple current account transfers — All cross-border loans must comply with the ECB framework. An ad-hoc parent-to-subsidiary transfer without ECB compliance is a capital account contravention under FEMA
• Not filing ECB-2 returns for active loans — Monthly ECB-2 returns are mandatory for the duration of any active ECB. Companies often obtain the LRN but forget the ongoing monthly reporting obligation

Timeline & What to Expect

For companies with established payment patterns (monthly management fees, quarterly royalties), the process becomes routine after the first cycle — templates are configured, purpose codes are mapped, and the 15CA/15CB workflow operates on a repeatable basis.

Comparison: Cross-Border Payment Structuring Options

Foreign companies can extract value from Indian operations through different payment mechanisms. The choice depends on: whether the Indian entity has distributable profits (required for dividends), whether there is a genuine underlying service (required for management fees), whether there is intellectual property being licensed (required for royalties), and whether debt structuring is appropriate (required for intercompany loans). Each mechanism has trade-offs in terms of tax efficiency, regulatory compliance burden, and transfer pricing defensibility.

Companies from Singapore benefit from one of India's most favorable DTAAs, with 10% rates on royalties and FTS. Companies from the United States face higher treaty rates (15% on royalties/FTS) but may benefit from the FTS 'make available' clause. Companies from the UAE have a competitive treaty with 10% rates on most categories. Companies from United Kingdom and Germany should evaluate the specific treaty provisions applicable to their payment types.

Understanding the differences between entity structures — branch office vs subsidiary — is also important, as the cross-border payment framework and tax implications differ significantly between these structures.

Practical Challenges in Cross-Border Payment Processing

AD Bank Documentation Delays

One of the most common operational challenges is the time taken by AD banks to process cross-border payments. Banks have internal compliance teams that review every foreign exchange transaction, and incomplete documentation leads to rejection or queries that delay the remittance by days or weeks. Common reasons for AD bank delays include: missing or incorrect Form 15CA acknowledgement number, purpose code mismatch between the company's declaration and the bank's assessment, incomplete underlying documentation (agreement missing, invoice not matching the payment amount), TDS challan not yet reflected in the bank's system, and for capital account transactions, missing FC-GPR or LRN references. Building a standardized documentation checklist for each payment type — and ensuring all documents are compiled before submitting the remittance request — eliminates most AD bank delays.

Foreign Exchange Rate Management

Cross-border payments involve currency conversion, and the exchange rate applied can significantly impact the effective cost of the transaction. AD banks typically apply their own exchange rate (which includes a spread over the interbank rate) at the time of processing. For large payments (management fees, loan repayments, dividend remittances), even a small rate difference can translate to a material amount. Strategies to manage FX exposure include: requesting competitive rate quotes from multiple AD banks for large transactions, timing payments to take advantage of favorable rate movements (within FEMA compliance timelines), using forward contracts for predictable recurring payments (available through AD banks for genuine underlying exposures), and negotiating preferential exchange rates for regular high-value remittances based on the company's overall banking relationship.

SWIFT Code and Correspondent Bank Issues

Outward remittances from India are processed through the SWIFT network, and incorrect beneficiary details — SWIFT code, account number, intermediary bank details — can result in payments being returned or held by correspondent banks. For payments to countries with less common banking corridors, correspondent bank charges and processing times can be higher. The AD bank advises on the most efficient routing for each payment destination.

Cross-Border Payment Compliance for Specific Transaction Types

Software Payments: The Royalty Debate

One of the most contested areas in cross-border payment taxation is whether payments for software — licenses, subscriptions, cloud services — constitute royalties under the Income Tax Act and applicable DTAAs. The Supreme Court of India ruled in Engineering Analysis Centre of Excellence (2021) that payments for standard, off-the-shelf software (shrink-wrap, click-through licenses) do not constitute royalties under DTAAs that follow the OECD model. However, customized software development, software embedded in goods, and software licensing with transfer of intellectual property rights may still be treated as royalties. This distinction is critical for SaaS companies and technology subsidiaries that make significant software-related cross-border payments.

Employee Deputation and Secondment Payments

When a foreign parent company seconds or deputes employees to the Indian subsidiary, the salary reimbursement payments between the entities must be carefully structured. If the payment is structured as a reimbursement of salary costs with no mark-up, it may not be subject to withholding tax (as it is not income of the parent). However, if Indian tax authorities characterize it as an FTS payment from the subsidiary to the parent for making personnel available, it attracts 20% withholding. The intercompany agreement must clearly document the deputation arrangement, specify who exercises control over the employee, and establish the cost recovery mechanism. GST implications also apply — the import of services (the employee's services) triggers reverse charge GST liability on the Indian subsidiary.

Reimbursement of Expenses

Cross-border reimbursements — where the Indian subsidiary reimburses the parent for expenses incurred on its behalf (travel, conferences, third-party services) — require careful tax treatment. Pure reimbursements at cost (without mark-up) may not attract withholding tax, but the payer must demonstrate that: the expenses were genuinely incurred on behalf of the Indian entity, no element of income or profit is embedded in the reimbursement, and the supporting documentation (original invoices from third parties) is available. If the tax authorities challenge the reimbursement as a payment for services, the withholding tax exposure is significant. Form 15CA/15CB must be filed for these payments, with the CA assessing the correct tax treatment.

Recent Regulatory Developments Affecting Cross-Border Payments

Several recent regulatory changes impact cross-border payment compliance:

• RBI's INR Settlement Framework (2023-2025) — The RBI has progressively enabled cross-border settlement in Indian Rupees through Rupee Vostro accounts opened by partner country banks. This is particularly relevant for trade with Russia, Sri Lanka, and certain other countries where INR settlement reduces forex costs and processing times
• ECB Regulation Amendments (February 2026) — RBI removed the fixed all-in-cost ceiling for ECBs and expanded eligible lender categories, making it easier and more flexible for foreign parents to lend to Indian subsidiaries
• TCS on LRS (Budget 2025) — The TCS threshold was increased from ₹7 lakh to ₹10 lakh, and rates were rationalized, reducing the compliance burden on individuals making remittances under LRS
• Export Realization Timeline Extension (November 2025) — RBI extended the deadline for realizing and repatriating export proceeds from 9 months to 15 months from the date of export, providing significant relief for exporters facing delayed payments
• Form 15CA/15CB Portal Updates — The Income Tax Department has progressively improved the e-filing portal for 15CA/15CB, with faster processing and better integration with AD bank systems, though portal outages during heavy filing periods remain a practical challenge

Staying current with these changes is essential for any entity making regular cross-border payments, as the compliance framework evolves continuously.