Repatriating Profits From India: What FEMA Actually Requires on Dividends, Royalties, and Technical Fees

Repatriating Profits From India: What FEMA Actually Requires on Dividends, Royalties, and Technical Fees

Most foreign companies entering India focus heavily on getting money in. The harder problem — one that surfaces only at year three when the Indian subsidiary is finally profitable — is getting money out. Many foreign principals assume repatriation is straightforward once the FDI is cleared; FEMA and the Income Tax Act together have a much more specific answer.

What the Regulation Actually Says

Under the Foreign Exchange Management Act, 1999 ("FEMA") and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), a foreign company that has invested in an Indian entity has three primary channels to repatriate value:

• Dividends — distributions of post-tax profits to non-resident shareholders
• Royalties — payments for use of intellectual property (brand, technology, patents, software)
• Technical Service Fees (TSF) — payments for technical know-how, management expertise, or services rendered by the foreign parent

Each channel has a distinct regulatory architecture, withholding tax obligation, and documentation requirement.

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Channel 1: Dividends

The baseline rule: Dividends paid by an Indian company to a non-resident shareholder are fully repatriable under the automatic route — no RBI or DPIIT approval is required, provided the original FDI was made under the automatic route (NDI Rules, Rule 4 read with Schedule I). The Authorised Dealer (AD Category-I) bank handles the outward remittance under the company's existing Current Account permissions.

Withholding tax: Under Section 115-O read with Section 194 of the Income Tax Act, 1961, dividends declared by an Indian company are subject to Tax Deducted at Source (TDS) at 20% plus applicable surcharge and cess (effective ~20.8%) for non-resident shareholders — unless a Double Taxation Avoidance Agreement (DTAA) reduces this rate.

Common DTAA rates on dividends:

To claim DTAA benefits, the foreign shareholder must furnish:

• Tax Residency Certificate (TRC) from its home country tax authority


• Form 10F filed with the Indian Income Tax Department


• Declaration of beneficial ownership (anti-treaty-shopping requirement under CBDT Circular)

Important regime note: India abolished Dividend Distribution Tax (DDT) in April 2020. Before that, DDT was paid by the Indian company; dividends reached foreign shareholders free of further tax. Post-abolition, dividends are taxed in the hands of shareholders at the rates above. Any analysis of India repatriation written before 2020 is outdated on this point.

Documentation sequence for dividend remittance:

• Board resolution declaring dividend


• Calculation of TDS at applicable rate


• Deduct and deposit TDS by the 7th of the following month


• File Form 27Q (TDS return for non-resident payments) — quarterly, due 15th of the month following each quarter


• File Form 15CA (Part A, B, or D depending on amount) on the Income Tax e-filing portal before remitting


• AD bank processes outward remittance; no separate FEMA reporting form is needed for ordinary dividend repatriation

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Channel 2: Royalties

Royalties paid by an Indian subsidiary to its foreign parent for use of trademarks, patents, software licences, or technical know-how are governed by a more scrutinized framework.

FEMA position: Royalty payments to non-residents are permissible Current Account Transactions under Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 ("CAT Rules"). AD banks process these remittances without requiring RBI or DPIIT approval — the liberalization of royalty caps in 2010 removed the earlier 8% of net sales ceiling.

However, the Indian subsidiary must establish:

• A valid Technology Licence Agreement (TLA) or Brand Licence Agreement executed between the Indian entity and the foreign licensor, board-approved on both sides


• Invoices and service evidence supporting each payment


• Transfer Pricing documentation — royalty rates between related parties are subject to arm's length scrutiny under Section 92 of the Income Tax Act

Withholding tax on royalties: Under Section 115A of the Income Tax Act, royalties paid to a non-resident attract TDS at 10% plus surcharge and cess (effective ~10.92% for most foreign companies). DTAA may reduce this:

The Transfer Pricing trap: Even where FEMA permits the outward remittance and the AD bank processes it, the Income Tax Department can disallow excessive royalty payments under Section 92C if they exceed the arm's length price. The Indian subsidiary's deduction is reduced and a TP adjustment is raised — creating a painful outcome: the money has left India, but the Indian entity still owes tax on the disallowed excess. Penalty exposure under Section 271(1)(c) adds 100–300% of the tax sought to be evaded.

TP documentation is mandatory where aggregate related-party transactions exceed INR 1 crore annually. This documentation must include:

• Functional analysis (Functions, Assets, Risks of both parties)


• Selection of appropriate transfer pricing method (Comparable Uncontrolled Price, Transactional Net Margin Method, or Profit Split as applicable)


• Benchmarking study with comparable royalty rates


• Form 3CEB — a Chartered Accountant certificate — due by November 30 of the relevant assessment year

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Channel 3: Technical Service Fees (Fees for Technical Services)

Technical service fees — sometimes called management fees, consultancy charges, or advisory fees — cover payments for specific technical or managerial services provided by the foreign parent to the Indian subsidiary.

FEMA position: Like royalties, TSF payments are remittable through AD banks under the CAT Rules without RBI/DPIIT approval. Required documentation:

• A written Service Agreement specifying scope, fee methodology, and payment terms


• Evidence that services were actually rendered: board approvals, service delivery reports, correspondence, invoices


• Arm's length pricing — this is the most actively litigated area in Indian transfer pricing disputes

Withholding tax — Fees for Technical Services (FTS): Under Section 115A and Section 9(1)(vii) of the Income Tax Act, FTS paid to a non-resident attracts TDS at 10% plus surcharge and cess. However, Section 9(1)(vii) defines FTS narrowly as services that are "managerial, technical, or consultancy" in nature. Routine cost recharges, pass-through expenses, or secondment arrangements without technical content may not qualify as FTS at all.

The "make available" clause in DTAAs: Several Indian treaties — including those with the USA, UK, Singapore, and Canada — limit FTS taxation to situations where the foreign provider "makes available" technical knowledge, skill, or know-how to the Indian entity. Where a service is delivered but no know-how is transferred to the recipient, the payment escapes Indian FTS tax entirely under these treaties. Under the India-USA treaty, FTS typically falls under Article 7 (Business Profits) — meaning if the US company has no Permanent Establishment (PE) in India, the fee is not taxable in India at all.

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Practical Implications: What Goes Wrong

1. No agreement → remittance blocked: AD banks will not process royalty or TSF payments without underlying agreements. Foreign companies that begin making informal intercompany transfers without documentation find the remittance flagged under FEMA scrutiny.

2. TP adjustment + cascading interest: A transfer pricing adjustment raises the tax demand, plus interest under Section 234B and 234C that compounds from the original due date. Combined with TP penalty, the effective cost of an aggressive royalty or management fee policy can dwarf the original tax saving.

3. TDS default → disallowance of deduction: If the Indian subsidiary fails to deduct TDS before remitting royalties or FTS, it becomes an "assessee in default" under Section 201(1). More critically, Section 40(a)(i) disallows the entire payment as a deduction in the Indian entity's hands — meaning the subsidiary pays full Indian corporate tax (25.17% effective rate) on the amount it paid out.

4. GAAR risk on misclassified dividends: Attempting to dress up what is effectively a profit distribution as a "royalty" or "management fee" is subject to the General Anti-Avoidance Rule under Chapter X-A of the Income Tax Act.

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Step-by-Step: What to Do

For dividends:

• Pass board resolution declaring dividend; specify amount per share and record date


• Determine TDS rate — 20% standard or lower DTAA rate; obtain TRC and Form 10F from foreign shareholder if claiming DTAA benefit


• Deduct TDS and deposit to government by the 7th of the following month


• File Form 27Q (quarterly TDS return for non-residents)


• File Form 15CA on the Income Tax e-filing portal (incometax.gov.in) before remittance; Form 15CB from CA required if claiming treaty rate


• Instruct AD bank to remit dividend net of TDS; retain SWIFT confirmation

For royalties and technical service fees:

• Execute a formal Technology/Brand/Service Licence Agreement — board-approved on both sides; set effective date prior to first payment


• Set rate at arm's length — benchmark contemporaneously using TNMM or CUP method


• Prepare and maintain TP documentation under Section 92D before the due date of filing the income tax return


• On each payment: obtain Form 15CA (Part B if amount exceeds INR 5 lakh in aggregate) and Form 15CB from a practising Chartered Accountant confirming TDS rate and DTAA position


• Submit Form 15CA on the income tax portal before the remittance; share acknowledgement and Form 15CB with AD bank


• AD bank remits funds and issues SWIFT; retain all records for at least 8 years


• Get Form 3CEB certified by a CA by November 30; file with the income tax return if aggregate international transactions exceed INR 1 crore

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Frequently Asked Questions

Q: Can I repatriate profits from an Indian LLP?
A: Profit share distributions from an LLP to a non-resident partner are technically permitted under FEMA, but LLPs face significant restrictions on receiving FDI under FEMA 20(R). Where a valid FDI-compliant LLP exists, profit distributions are treated similarly to dividends for FEMA and TDS purposes. Confirm with your AD bank before remitting.

Q: Is there a cap on royalty rates I can charge my Indian subsidiary?
A: There is no FEMA cap on royalty rates as of 2025 — the old 8% of net sales ceiling was removed by DPIIT in 2010. However, the rate must be commercially justifiable and at arm's length under transfer pricing rules. The Income Tax Department routinely benchmarks rates against comparables and disallows anything that appears inflated.

Q: When exactly must Form 15CA and 15CB be filed?
A: Both must be filed before the remittance is initiated — not after. Form 15CA is filed online on the Income Tax e-filing portal and generates an acknowledgement number. The AD bank will require both before processing the outward remittance. Filing after the fact does not cure the TDS default.

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Closing

Repatriation is not an afterthought — it is the economic return on your India investment. Structuring intercompany agreements correctly at the time of entry, setting transfer pricing policies before the first payment, and establishing a disciplined TDS and FEMA compliance calendar determines whether your profits flow home cleanly in Year 3 or get tied up in tax disputes and bank holds for years.

Planning India entry? Start with a free structure review at makeitlegit.in.

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