Intra-group loans and guarantees: how are interest rates and guarantee fees benchmarked for Indian transfer pricing?

Loans: the benchmarking method

The comparable uncontrolled price method applies: what would an independent lender charge this borrower for this loan? The analysis has four steps.

1. Characterise the instrument. Is it debt at all? A perpetual, unsecured, interest-deferred advance to a subsidiary with no capacity to repay may be re-characterised as equity. Term, security, subordination, currency and repayment profile all matter.
2. Rate the borrower. A standalone credit rating of the borrower (using rating-agency methodologies or commercial tools), adjusted — carefully — for implicit group support. Indian tribunals have accepted that a subsidiary's rating may be notched up for group membership but not equated with the parent's.
3. Pick the benchmark for the currency. The currency of the loan determines the base rate: SOFR for USD, EURIBOR for EUR, SBI MCLR or government securities for INR. Indian courts have repeatedly held that an INR-denominated loan cannot be benchmarked against LIBOR/SOFR and vice versa.
4. Add the spread. From market data for the rating, tenor and security — bond yields, loan databases, or the published safe harbour spreads as a reference.

Safe harbour benchmarks

Rules 86 to 102 of the Income-tax Rules, 2026 continue the safe harbour for intra-group loans advanced by Indian companies to their foreign associated enterprises: for rupee loans, the one-year marginal cost of funds lending rate of SBI plus a spread by the borrower's credit rating; for foreign-currency loans, the six-month reference rate for the currency (SOFR, EURIBOR, etc.) plus a rating-based spread. Opting in through Form 49 by the return due date, with the Assessing Officer's validation, removes the dispute for outbound loans. For inbound loans (from the parent) the safe harbour does not apply, but the same benchmarks are a sensible reference for what an Indian lender would charge.

Corporate guarantees

When an Indian parent guarantees a foreign subsidiary's bank loan, Indian transfer pricing treats the guarantee as an international transaction (expressly, since 2012) and expects a fee. The safe harbour allows a commission of 1% per annum on the guaranteed amount for guarantees to wholly owned subsidiaries, within the prescribed amount limit (or above it if the subsidiary is rated at the highest safety grade). Outside safe harbour, tribunals have accepted fees from about 0.5% upward depending on the benefit to the borrower (the interest saving from borrowing with the guarantee versus without), and have rejected the department's bank-guarantee-rate comparisons. When the Indian company is the borrower under a parent guarantee, any fee it pays must likewise be arm's length, deductible subject to section 177 and withheld on as "other income" under the Act or the treaty's other-income/business-profits article.

Interest-free loans and receivables

An Indian company that funds its foreign subsidiary without interest will have arm's length interest imputed — the "no income, no transfer pricing" argument has failed consistently. The remedy is either to charge interest at the benchmark, or to capitalise the subsidiary through ODI equity instead. Similarly, trade receivables from an associated enterprise outstanding beyond the credit period independent customers get (commonly 30 to 90 days) are a deemed loan on which interest is imputed; a working-capital adjustment in the TNMM analysis can sometimes absorb this, but the simpler fix is to collect on time.

Inbound loans: the regulatory overlay

A loan from the foreign parent must comply with the ECB framework (three-year minimum average maturity; market-aligned pricing with no all-in-cost ceiling for three-year-plus loans after February 2026; Form ECB and LRN; monthly ECB-2). The interest is deductible subject to section 177 — 30% of EBITDA where interest to associated enterprises exceeds ₹1 crore, with eight-year carry forward — and is withheld on at 20% plus surcharge and cess or the treaty rate. Transfer pricing can only reduce the deductible interest, never increase it above what was paid.

Frequently asked questions

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.

• Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
• RBI Master Directions — Reporting under FEMA; External Commercial Borrowings; Overseas Investment; Export of Goods and Services; LRS
• FEMA notifications — Reserve Bank of India

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.

Related reading

• How can an Indian subsidiary borrow from its foreign parent — External Commercial Borrowing basics after the 2026 amendments?
• Which transfer pricing method applies under section 165 — and when do cost-plus and TNMM fit?
• How does the 15.5% safe harbour for IT services work under the Income-tax Rules, 2026?
• How does Overseas Direct Investment by Indian companies and individuals work under the Overseas Investment Rules, 2022?
• Cross-Border Tax & Transfer Pricing — what the firm does