Introduction
Every foreign investor ultimately asks one crucial question — how do we take our profits back home without attracting tax or regulatory trouble?
Repatriation is often more complex than bringing capital into India. Once profits are earned, the method of sending them out — whether as dividends, share buybacks, or royalties — determines how much tax you pay, how the Reserve Bank of India (RBI) views the transaction, and whether your structure can withstand scrutiny under FEMA and the Income Tax Act.
This guide explains how to legally repatriate profits from India, optimize taxation under DTAA (Double Taxation Avoidance Agreement), and stay fully compliant under FEMA.
If you haven’t read our foundational article, start with:
Taxation of Foreign Investment in India – FEMA, Income Tax & DTAA Explained
What Does “Repatriation of Profits” Mean Under Indian Law?
Repatriation means transferring profits, dividends, or capital from India to a foreign shareholder or parent company in compliance with FEMA and Indian tax laws. It covers dividends, share buybacks, royalties, fees, and capital reduction — each with separate tax and reporting rules.
Legal Context
Under the Foreign Exchange Management Act, 1999 (FEMA), any foreign exchange going out of India must follow prescribed “current” or “capital” account routes.
- Dividends and royalties are treated as current account transactions (no prior RBI approval).
- Buyback or capital reduction involves capital account transactions (requiring valuation, board/shareholder approval, and RBI reporting).
The Income Tax Act, 1961 governs how each of these payments is taxed and whether withholding tax (TDS) applies.
1. Dividend Route — Simple, Familiar, but Taxed at Source
Dividends are the most common way to repatriate profits. The Indian company deducts withholding tax before remittance. Under most DTAAs, this tax can reduce from 20% to 5–15% for eligible foreign shareholders.
Detailed Analysis
- Legal Basis: Section 115A and 195 of the Income Tax Act.
- FEMA Classification: Current account transaction; freely repatriable through an Authorised Dealer (AD) bank.
- Taxation:
- Domestic rate: 20% (plus surcharge and cess).
- DTAA relief: Can reduce to 5–15%, subject to TRC and beneficial ownership.
- Compliance:
- File Form 15CA/CB (certified by CA).
- Pass board resolution declaring the dividend.
- Maintain proof of remittance and TRC for treaty benefit.
✅ Advantages:
- Straightforward and accepted by RBI.
- Ideal for regular annual payouts.
⚠️ Limitations:
- No tax deduction allowed to the Indian company.
- Post-tax distribution — double taxation if not structured under DTAA.
For detailed tax background, refer to your related article: Taxation of Foreign Investment in India – FEMA, Income Tax & DTAA Explained
2. Buyback Route — Efficient but Closely Watched
Share buyback allows an Indian company to repurchase its shares from foreign investors. It’s treated as capital return, but attracts a 20% buyback tax at the company level. It can be efficient, but requires careful FEMA and tax documentation.
How It Works
In a buyback, the company purchases its own shares from shareholders and extinguishes them. For foreign shareholders, the payment is considered capital repatriation rather than dividend.
- Tax:
- Section 115QA imposes 20% buyback tax on the company.
- The foreign shareholder’s receipt is tax-exempt in India.
- FEMA:
- Buyback must comply with pricing guidelines and share valuation norms.
- Post-transaction Form FC-TRS must be filed with the RBI through the FIRMS portal.
- Approvals:
- Board and shareholder approvals required.
- For private companies, filings under Companies Act, 2013 and Rule 17 of the Share Capital and Debentures Rules apply.
✅ Advantages:
- Capital-efficient for returning surplus cash.
- Can provide one-time exit for foreign investors.
⚠️ Limitations:
- Scrutinized for misuse as disguised dividend distribution.
- Requires robust valuation and FEMA reporting.
For compliance guidance, see:
FEMA & FDI Compliance in India: Key Filings and Approvals Every Company Must Know
3. Royalty or Technical Fee Route — Contractual but Sensitive
Royalties or technical fees allow foreign parent companies to receive recurring payments for IP, brand use, or technical support. They’re tax-deductible in India but attract withholding tax and close scrutiny for arm’s-length pricing.
Detailed Explanation
- Tax:
- Withholding tax (TDS) at 10–20% under Section 115A, subject to treaty relief.
- Deductible expense for the Indian subsidiary if payments are genuine and at arm’s length.
- FEMA:
- Considered a current account transaction.
- No RBI approval needed if payments are within sectoral limits and backed by valid agreements.
- Form 15CA/CB and invoice trail required.
- Scrutiny Risks:
- Royalty agreements often examined under Transfer Pricing and Base Erosion and Profit Shifting (BEPS)norms.
- Authorities check whether payments correspond to actual services rendered or IP use.
✅ Advantages:
- Allows ongoing profit repatriation while keeping capital intact.
- Deductible in India, improving overall tax efficiency.
⚠️ Limitations:
- High audit scrutiny — every payment must be justified.
- Excessive or artificial royalties may be recharacterised as disguised dividends.
Comparison of Routes
| Mode | Nature | Tax on Company | Tax on Investor | FEMA Reporting | Scrutiny Level | Ideal For |
|---|---|---|---|---|---|---|
| Dividend | Current account | Deduction not allowed | 5–20% WHT | Form 15CA/CB | Low | Regular payouts |
| Buyback | Capital account | 20% buyback tax | Exempt | FC-TRS | Medium | Capital return |
| Royalty/Fees | Current account | Deductible | 10–20% WHT | Form 15CA/CB | High | IP & service models |
How to Avoid Tax and FEMA Scrutiny During Repatriation
Ensure transparent documentation, proper valuation, and correct routing of funds. Use one clear method per transaction, file all RBI and tax forms on time, and maintain supporting evidence of services, board approvals, and TRC certificates.
Best Practices
- Maintain valuation and justification for each remittance.
- File FC-TRS and FC-GPR correctly for capital transactions.
- Obtain Form 15CB from a Chartered Accountant before every foreign remittance.
- Keep TRC and beneficial ownership declarations updated annually.
- Avoid dual-route repatriations (e.g., partial dividend, partial royalty).
- Conduct annual FEMA compliance audits for all foreign-held entities.
Proactive compliance is cheaper than reactive compounding.
For checklists, see:
👉 Post-Incorporation Compliance Checklist for Indian Companies
Example: UAE Parent Repatriating Profits
A UAE-based investor holds 75% shares in an Indian subsidiary.
- The company declares ₹2 crore dividends, applies 10% DTAA rate (instead of 20%), and remits funds with Form 15CB and TRC.
- A year later, it executes a buyback for ₹3 crore to repatriate idle capital — supported by valuation and FC-TRS filing.
Both transactions are clean, reported, and accepted by AD bank and RBI — achieving tax-efficient repatriation with zero red flags.
Strategic Takeaways
- Choose the right route based on intent — dividends for ongoing profits, buyback for capital return, royalties for IP or services.
- Plan repatriation before the financial year ends — to match tax and accounting timelines.
- Keep FEMA filings, valuation, and documentation impeccable — scrutiny is document-driven.
- Engage both a Company Secretary (for FEMA) and a tax advisor (for DTAA and withholding) simultaneously.
About the Author
Prashant Kumar is a Company Secretary, Published Author, and Partner at Eclectic Legal, a full-service Indian law firm advising on FEMA, FDI, and cross-border profit repatriation strategies.
He helps Indian subsidiaries and foreign investors structure tax-efficient exits, repatriate profits, and comply with RBI and Income Tax requirements.
He can be reached at prashant@eclecticlegal.com or +91-9821008011.
