The Afghan citizen was arrested on charges of rousing anti-Pakistan sentiment.
The police told the court that the man named Naimat who displayed the flag on a billboard near Bora Bazaar area of Peshawar, was asked by officials to remove the flag but he refused to do so. He was subsequently arrested on Thursday.
An FIR was registered against him under section 153-A of the Pakistan Penal Code, which deals with charges of promoting disharmony among segments of the population.
The police maintain that the suspect hoisted the flag deliberately on 14 August with a motive to stir Afghan refugees against the state of Pakistan.