P1401 Purpose Code: Compensation of employees

Purpose code P1401 is used when someone in India receives salary or other employment income from a foreign employer.

What is the P1401 purpose code?

Purpose code P1401 covers employment income reaching India from a foreign employer, meaning salary, wages, bonuses, allowances and similar benefits paid under a contract of employment. It sits in the primary income group because the money is a return for labour supplied rather than payment for a service sold. That distinction is the one to be careful about: an employee receives compensation, while a contractor or freelancer invoicing a foreign client is exporting a service, and the two report under entirely different codes even where the work looks the same. Under RBI FEMA guidelines, this inward payment is classified under Primary Income and reported accordingly.

When to use P1401 purpose code?

Use P1401 where you are employed by a company outside India and receive your salary or other employment income from it. What settles the code is the employment relationship: you work under a contract of employment rather than invoicing for services delivered. If you raise invoices, decide how and when you work, and bill for output rather than being paid a salary, you are more likely a contractor, and your income reports under the services code describing your work.

When to use a different code:

• Use the relevant services code when you invoice a foreign client as a contractor or freelancer rather than being employed by them
• Use P1301 when the money is family support from a non-resident rather than employment income
• Use the matching S-code when money is being sent abroad rather than received

Who typically uses P1401 purpose code

Individuals resident in India who are employed by companies based outside the country, including people working remotely for a foreign employer under a contract of employment. It concerns individuals receiving salary rather than businesses receiving client payments.

Examples of transactions covered under P1401 purpose code

• Monthly salary paid by a foreign employer to an employee living in India
• Bonus or incentive payment received from an overseas employer
• Allowances paid under a contract of employment with a company abroad
• Final settlement received from a foreign employer on leaving employment

When NOT to use P1401 purpose code

• You invoice a foreign client as a contractor or freelancer rather than being employed by them, in which case your income reports under the services code describing your work
• The money is family support from a non-resident rather than employment income (use P1301)
• The money is a share of profits or dividends rather than compensation for work, which reports under the other primary income codes
• Money is being sent abroad rather than received (use the matching S-code)

Documents required for P1401 purpose code

To receive a payment under P1401, keep the following documents ready so your bank can verify the transaction and report it correctly under FEMA.

How is a P1401 Purpose Code declared?

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

1. Establish the relationship: Confirm that you are employed by the overseas company rather than contracting with it.
2. Receive the payment: The employer remits your salary or other employment income to your Indian account.
3. Declare the purpose: State the purpose of the inward remittance on your bank's form.
4. Submit supporting documents: Provide the employment contract and payslip 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 P1401 purpose code

A few common slips can cause reporting problems or leave you without records you need.

1. Coding contractor income as salary: Using P1401 when you invoice a foreign client rather than being employed by them, which misreports a services export as employment income and leaves you without a FIRA evidencing the work you actually exported.
2. Assuming remote work means employment: Treating any arrangement with a foreign company as employment, when many remote arrangements are contracts for services and the distinction changes the code entirely.
3. Code and document mismatch: The code not matching what your contract describes, which flags the payment.
4. Incomplete documents: Missing the employment contract or payslip, so the bank cannot establish the relationship and holds the payment 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

P1401 covers salary paid by a foreign employer, which Skydo does not process. But if you invoice a foreign company rather than being employed by it, you are exporting a service, and that is exactly what Skydo is built for.

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.