An Indian company may borrow in foreign currency or rupees from its foreign parent (a "foreign equity holder" with at least 25% direct holding, or an indirect holder of 51%, or a group company with a common overseas parent) under the External Commercial Borrowings framework in the FEM (Borrowing and Lending) Regulations and the RBI's ECB Master Direction, as amended with effect from 16 February 2026. The amendments set a uniform minimum average maturity of three years for all ECBs, removed the all-in-cost ceiling for ECBs with average maturity of three years or more (pricing must now be market-aligned and, for related lenders, arm's length), and retained a ceiling of benchmark plus 300 basis points (foreign currency) or 250 basis points (rupee) for shorter trade-credit-type borrowing. The borrower files Form ECB through its bank to obtain a Loan Registration Number before drawdown and files monthly ECB-2 returns. Interest is deductible subject to the 30% of EBITDA cap in section 177 of the Income-tax Act, 2025 and withheld at 20% plus surcharge and cess or the treaty rate.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Framework | FEM (Borrowing and Lending) Regulations, 2018; ECB Master Direction | As amended by FEMA 3(R)(5)/2026-RB (in force 16 Feb 2026) | — | — | — |
| Eligible borrowers | All entities eligible to receive FDI; plus specified others | Unchanged | — | — | — |
| Recognised lenders | Residents of FATF/IOSCO-compliant countries; foreign equity holders; multilateral institutions | Unchanged | Foreign equity holder: ≥25% direct, ≥51% indirect, or common overseas parent | — | — |
| Minimum average maturity (MAMP) | 3 years general; 5/7/10 years by end-use | Uniform 3 years (1–3 years permitted for manufacturing up to USD 150 million outstanding) | — | — | — |
| All-in-cost ceiling | Benchmark + 500 bps (FCY); + 450 bps (INR) | Removed for MAMP ≥ 3 years; benchmark + 300 bps (FCY) / + 250 bps (INR) below 3 years | Market-aligned; arm's length for related lenders | — | — |
| Borrowing limit (automatic) | USD 750 million or equivalent per FY | Unchanged (check current Master Direction) | — | Per financial year | — |
| End-use restrictions | Negative list: real estate, capital market, equity investment, on-lending (with exceptions) | Substantially unchanged | — | — | — |
| Reporting | Form ECB → LRN; ECB-2 monthly | Unchanged | — | Form ECB before drawdown; ECB-2 by the 7th of following month | Form ECB, ECB-2 |
| Withholding on interest | s. 195, 115A (concessional 5% under 194LC lapsed 1 July 2023) | s. 393(2), 207: 20% + surcharge + cess or treaty | Treaty 10%–15% typical | At credit or payment | Forms 145/146 |
| Interest deduction cap | s. 94B | s. 177: 30% of EBITDA where AE interest > ₹1 crore; 8-year carry forward | — | — | — |
| Transfer pricing on interest rate | s. 92; CUP | s. 161; CUP | Benchmark to market rates for the currency and rating | Annual | Form 48 |
Why a parent loan is an ECB
Any borrowing by an Indian company from a non-resident — including its own parent — is an External Commercial Borrowing unless it is trade credit for imports or falls within another specific permission. The parent is a "foreign equity holder" and a recognised lender if it holds at least 25% of the Indian company directly, or 51% indirectly, or is a group company under a common overseas parent. The alternative to debt is more equity (FC-GPR) or compulsorily convertible instruments, which are treated as equity under FEMA and avoid the ECB framework altogether; optionally convertible or non-convertible debentures are debt and follow ECB rules.
What the 2026 amendments changed
- One minimum average maturity: three years. The old matrix — three years generally, five years for working capital or general corporate purposes from a foreign equity holder, seven or ten years for certain repayment of rupee loans — is replaced by a uniform three-year MAMP, with a one-to-three-year window for manufacturing companies up to USD 150 million outstanding.
- No all-in-cost ceiling for three-year-plus ECBs. The former cap of benchmark rate plus 500 basis points (foreign currency) or 450 (rupee) is removed for ECBs with MAMP of three years or more. Pricing must reflect prevailing market conditions, and for related-party loans must be at arm's length — which transfer pricing requires anyway. Below three years, benchmark plus 300 basis points (foreign currency) or 250 (rupee) applies.
- Prepayment and penal charge caps removed.
End-use restrictions continue: ECB proceeds may not be used for real estate activities, investment in capital markets, equity investment, on-lending (except by eligible lenders) or purchase of land. Working capital and general corporate purposes are permitted within the three-year MAMP.
The process
- Loan agreement with the parent: amount, currency, benchmark and spread, drawdown and repayment schedule meeting the three-year MAMP, end-use, security if any.
- Form ECB filed through the AD bank with the agreement; the RBI allots a Loan Registration Number. No drawdown before the LRN.
- Drawdown through the AD bank; hedging as the Master Direction requires for the borrower's category.
- ECB-2 return every month by the 7th of the following month, through the bank, for the life of the loan.
- Interest and repayment through the same bank; withholding and Forms 145/146 on each interest payment.
- Changes to terms (currency, lender, maturity, spread) reported; some need prior approval.
The tax layer
Transfer pricing. The interest rate on a parent loan is tested under CUP: the benchmark for the currency (SOFR, EURIBOR, SBI MCLR for rupee loans) plus a spread for the borrower's credit standing. The Indian safe harbour rules provide a benchmark for intra-group loans by rating band, which many groups use directly.
Thin capitalisation — section 177. Where interest paid to associated enterprises exceeds ₹1 crore in a tax year, the deduction is limited to 30% of EBITDA; the disallowed excess carries forward for eight years. Banks and insurers are excluded. Guarantees by the parent for third-party loans bring that interest within the rule too.
Withholding. Interest to a foreign company is taxed at 20% plus surcharge and cess under section 207 unless the treaty is lower — commonly 10% to 15%. The concessional 5% rate for ECB interest under old section 194LC lapsed for borrowings after 30 June 2023. Form 146 and Form 145 Part C accompany each payment once the year's taxable payments to the lender exceed ₹5 lakh.
GST. Interest on loans is exempt; processing or arrangement fees charged by the parent are imported services under reverse charge.
Worked example
A German parent lends its Indian subsidiary EUR 3 million for five years at 6-month EURIBOR plus 250 basis points, bullet repayment, for working capital and capex.
- FEMA: recognised lender (100% equity holder); MAMP five years ≥ three; pricing market-aligned (no ceiling applies at this maturity); end-use permitted. Form ECB filed; LRN received; drawdown; ECB-2 monthly.
- Transfer pricing: EURIBOR + 250 bps benchmarked against market spreads for a company of the subsidiary's standing; documented in the local file.
- Interest: about EUR 150,000 a year (₹1.35 crore). The Indian company's EBITDA is ₹3 crore; the section 177 cap is ₹90 lakh, so ₹45 lakh of interest is disallowed this year and carried forward.
- Withholding: 10% under the India–Germany treaty (TRC, Form 41) = ₹13.5 lakh a year; Form 146 and Form 145 Part C each payment.
Had the parent instead subscribed EUR 3 million of compulsorily convertible debentures, FEMA would treat it as equity (FC-GPR, pricing guidelines, no MAMP), the coupon would still be interest for tax, and section 177 would still apply.
Common mistakes we see
- Drawing down the parent loan before the LRN is allotted.
- Structuring a two-year parent loan on the assumption that the old five-year working-capital rule applied, or ignoring the three-year MAMP entirely.
- Pricing the loan at the parent's own cost of funds with no spread, which fails transfer pricing in the other direction (too low for a riskier borrower) or at a spread with no benchmarking.
- Deducting all the interest without computing the section 177 EBITDA cap.
- Stopping ECB-2 returns in months with no transactions; the return is due every month until the loan is closed.
- Treating non-convertible or optionally convertible debentures issued to the parent as FDI; they are debt under the ECB framework.
Frequently asked questions
Can a foreign parent lend money to its Indian subsidiary?
Yes, as an External Commercial Borrowing. The parent qualifies as a recognised lender if it holds at least 25% of the Indian company directly, 51% indirectly, or is a group company under a common overseas parent. The loan needs a Loan Registration Number before drawdown.
What is the minimum maturity for an ECB in 2026?
A uniform minimum average maturity of three years for all ECBs following the February 2026 amendments, with a one-to-three-year window for manufacturing companies up to USD 150 million outstanding.
Is there a cap on the interest rate?
Not for ECBs with an average maturity of three years or more — the all-in-cost ceiling was removed from 16 February 2026; pricing must be market-aligned and at arm's length for related lenders. For shorter borrowing, benchmark plus 300 basis points (foreign currency) or 250 basis points (rupee) applies.
Is interest paid to the foreign parent fully deductible?
Subject to section 177 of the Income-tax Act, 2025: where interest to associated enterprises exceeds ₹1 crore, the deduction is capped at 30% of EBITDA with an eight-year carry forward of the excess.
What is the withholding tax on ECB interest?
20% plus surcharge and cess under section 207, or the treaty rate (commonly 10% to 15%) with a TRC and Form 41. The concessional 5% rate for ECB interest lapsed for loans after 30 June 2023.
What reporting is required after drawdown?
A monthly ECB-2 return through the AD bank by the 7th of the following month for the life of the loan, plus reporting of any change in terms.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- FEMA notifications — Reserve Bank of India
- RBI Master Directions — Reporting under FEMA; External Commercial Borrowings; Overseas Investment; Export of Goods and Services; LRS
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- Double Taxation Avoidance Agreements — Income Tax Department
- e-Gazette of India — Finance Act, 2026; Income-tax Rules, 2026; FEMA notifications
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
