P1306 Purpose Code: Receipts / Refund of taxes

Purpose code P1306 is used when money is received in India as a refund of taxes paid abroad.

What is the P1306 purpose code?

Purpose code P1306 covers money returned to India by a foreign tax authority. The common case is tax that was withheld at source or overpaid in another country and later reclaimed, which is a frequent situation for Indian businesses and freelancers earning abroad. What places it in this group is that the money is being returned rather than earned: no goods, services or work sit behind the receipt, even though the original payment it relates to may well have been services income under another code. Under RBI FEMA guidelines, this inward payment is classified under Secondary Income and reported accordingly.

When to use P1306 purpose code?

Use P1306 when a foreign revenue authority refunds tax to you in India, whether that is withholding tax reclaimed under a treaty, overpaid tax returned after assessment, or another refund of tax paid abroad. It is the correct RBI receipt code for the refund itself. The original payment that the tax was deducted from reports separately under whichever code describes the underlying work, so a reclaim generates a second receipt rather than replacing the first.

When to use a different code:

• Use the relevant services code when the money is payment for work rather than a refund of tax
• Use the group 15 refund codes when the money is a refund or reversal that is not a tax refund
• Use the matching S-code when money is being sent abroad rather than received

Who typically uses P1306 purpose code

Indian individuals and businesses reclaiming tax paid or withheld in a foreign jurisdiction, including freelancers and exporters whose overseas clients withheld tax at source and companies recovering overpaid foreign tax after assessment. It applies whether you file as an individual, a proprietorship, or a registered company.

Examples of transactions covered under P1306 purpose code

• Withholding tax reclaimed from a foreign revenue authority under a tax treaty
• Overpaid foreign tax returned after an assessment abroad
• A refund received following a filing made in the country where tax was deducted
• Tax recovered from an overseas authority in respect of earlier earnings

When NOT to use P1306 purpose code

• The money is payment for goods, services or work rather than a refund of tax, which reports under whichever code describes that supply
• The money is a refund or reversal that is not a tax refund, which reports under the refund codes in group 15
• The money is a personal transfer from family abroad rather than a refund (use P1301)
• Money is being sent abroad rather than received (use the matching S-code)

Documents required for P1306 purpose code

To receive a payment under P1306, keep the following documents ready so your bank can verify the transaction and report it correctly under FEMA.

How is a P1306 Purpose Code declared?

Declaring the code is pretty straightforward. Here's how the payment gets tagged and reported.

1. Make the claim: File with the foreign tax authority for the refund of tax paid or withheld.
2. Receive the refund: The authority remits the money to your Indian account.
3. Declare the purpose: State the purpose of the inward remittance on your bank's form, identifying it as a tax refund.
4. Submit supporting documents: Provide the refund notice and evidence of the original deduction so the bank can verify the receipt.
5. Get your FIRA: Once processed, your FIRA is issued as proof and the payment is reported under FEMA.

Common mistakes to avoid while using P1306 purpose code

A few common slips can cause reporting problems.

1. Coding a refund as fresh income: Using the services code that covered the original invoice, when the refund is money being returned rather than earned. Doing so overstates your export earnings and misreports the transaction.
2. Treating every refund the same way: Applying P1306 to refunds that are not tax refunds, when group 15 carries its own codes for reversals and other refunds.
3. Code and document mismatch: The code not matching what the refund notice describes, which flags the payment.
4. Incomplete documents: Missing the refund notice or evidence of the original deduction, so the bank cannot establish what the money is and holds it until provided.
5. Missing PAN or KYC: Incomplete verification stops the bank from releasing the payment.
6. Using an inward code for an outward payment: Applying a receipt code to money being sent out instead of the matching outward code.

How Skydo helps you receive international business payments

P1306 covers tax refunds from foreign revenue authorities, which Skydo does not process. If you invoice clients abroad and had tax withheld from those payments, here is how Skydo helps you receive the client payments themselves.

1. Complete onboarding: Share PAN, Aadhaar, and Indian bank details. Setup is fully online.
2. Get virtual account details: Receive account details in USD, GBP, EUR and other currencies your clients pay in.
3. Your client pays like a local: They send a domestic transfer in their own country, no SWIFT and no wire fee on their end.
4. FIRA is generated automatically: Free e-FIRA on every payment, stored in your dashboard for GST and audits.
5. INR settles within 24 hours: Mid-market rate with a flat, visible fee, no FX markup.