Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed against the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026
Introduction
Until February 2026, a loan from a foreign parent to its Indian subsidiary sat in a defined regulatory box. The parent was a “foreign equity holder”, that status carried its own rules, and the interest rate was capped by a formula.
That box no longer exists.
The concept of “foreign equity holder” has been done away with under the 2026 Regulations, and a general requirement for ECBs from related parties to be on an arm’s length basis has been added.
Read that carefully, because it changes what kind of exercise this is. A parent loan is no longer form-filling against a prescribed ceiling. It is a related party transaction that has to be defensible as arm’s length — which means it now engages the same analysis as your management fee and your royalty, and it will be examined by the same transfer pricing officer.
Alongside that, the all-in-cost ceiling has been abolished entirely, the minimum maturity standardised, the borrowing limit raised substantially, and Form ECB-2 has stopped being a monthly filing.
Most published guidance has not caught up. Pages updated within the last month still quote all-in-cost ceilings expressed as a spread over LIBOR — a benchmark that no longer exists, under a ceiling that no longer applies.
This guide sets out what the framework now says, what the arm’s length requirement actually demands, and the tax provision that limits your interest deduction regardless of what FEMA permits.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. A parent loan is usually the second funding step after equity, and it is the transaction where FEMA, transfer pricing and withholding tax bite at once.
Where a rule is settled we state it. Where the February 2026 amendments displaced the previous position — and on most key parameters they did — we give both, so older material can be placed rather than simply distrusted.
Primary sources: the Reserve Bank of India for the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 as amended in 2026, and the reporting framework; and the Income Tax Department for interest deductibility and withholding.
1. Three things the ranking pages get wrong
| Commonly published | The position since 16 February 2026 |
|---|---|
| “All-in-cost ceiling is 6% above LIBOR for infrastructure, 5% above LIBOR for general ECB” | All-in-cost ceilings removed entirely. LIBOR was also discontinued years earlier; the pre-amendment benchmark was a risk-free rate such as SOFR |
| “Automatic route limit is USD 750 million per borrower per financial year” | Raised to the higher of USD 1 billion outstanding, or 300% of net worth |
| “MAMP is 3 years up to USD 50 million and 5 years beyond” | Standardised at 3 years, with the multi-tiered structure removed |
The LIBOR point is worth pausing on, because it appears on pages updated recently. A guide quoting a ceiling over a discontinued benchmark is telling you two things: it is not current, and nobody checked.
2. What changed in February 2026
The Reserve Bank of India issued the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 on 9 February 2026. These came into effect from the date of publication in the Official Gazette, being 16 February 2026.
The amendment consolidates and restructures provisions relating to ECBs that were earlier spread across the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations, 2019, and frequently answered questions.
| Parameter | Before | Now |
|---|---|---|
| Parent lender status | “Foreign equity holder” — a defined category | Concept removed; related-party ECBs must be at arm’s length |
| Pricing | All-in-cost ceiling: benchmark plus prescribed spread | Ceiling removed; “cost of borrowing” in line with market conditions |
| Minimum average maturity | Multi-tiered by amount and end-use | Standardised at 3 years |
| Borrowing limit | USD 750 million per financial year | Higher of USD 1 billion outstanding or 300% of net worth |
| Lender jurisdiction | FATF or IOSCO compliant required | Requirement removed |
| Form ECB-2 | Monthly | Cashflow-based |
| AD bank NOCs | Required for security, term changes, transfers | No longer required |
2.1 The pricing change
As a measure of significant liberalisation, the Revised ECB Regulations removed the construct of all-in-cost ceiling which existed under the earlier regulations. They introduced the construct of “cost of borrowing”, which is to be in line with prevailing market conditions. Cost of borrowing means the rate of interest, other fees, expenses, charges, guarantee fees and export credit agency charges, whether paid in foreign currency or INR, and includes commitment fees and statutory taxes payable in India.
For ECBs with a minimum average maturity period below 3 years, the all-in cost remains subject to trade credit ceilings.
Pricing has been made market-based instead of being capped at a benchmark plus specified spread.
2.2 Why this is harder, not easier, for a parent loan
Removing a ceiling sounds like freedom. For a related-party loan it is the opposite of freedom.
Under the old framework, a parent could price at or near the permitted ceiling and point to the regulation. The rate was defensible because it was the rate the rules allowed.
Now there is no ceiling to point at. The rate has to be justified as what an unrelated lender would have charged this borrower for this loan — which is a benchmarking exercise, not a compliance box.
Groups that read “ceilings abolished” as “we can charge what we like” have misread it. What was abolished was the safe harbour.
3. Is a parent loan even an ECB?
Yes, and this is the first thing to establish because groups sometimes treat an intercompany advance as something other than a borrowing.
External commercial borrowing is a loan raised by an eligible Indian entity from a recognised non-resident lender, governed by the RBI’s framework under FEMA, 1999.
Money advanced by an overseas parent to its Indian subsidiary, repayable, is a loan from a non-resident to a resident. Calling it a “current account advance”, an “inter-company balance” or “working capital support” does not change what it is.
3.1 What it is not
| Arrangement | Framework |
|---|---|
| Parent subscribes for shares | FDI — see share valuation for FDI |
| Parent lends money | ECB |
| Parent supplies goods on deferred payment terms | Trade credit — a separate framework with its own limits |
| Parent pays an Indian vendor on the subsidiary’s behalf | Depends on the arrangement; frequently becomes a borrowing in substance |
| Subsidiary bills the parent and payment is delayed | Export receivable, subject to realisation periods — see SOFTEX filing |
3.2 The one that catches people
The fourth row. A parent that settles Indian invoices directly — landlord, vendor, statutory dues — on the basis that the subsidiary will “square it up later” has created an obligation of the subsidiary to a non-resident.
Left in an intercompany account for two years, that is a borrowing with no LRN, no reporting and no maturity. It surfaces in diligence as an unexplained non-resident liability, and it is far harder to regularise than a properly documented loan would have been to set up.
4. The arm’s length requirement
This is the article’s central point and the biggest practical change for foreign groups.
4.1 What it pulls in
Once a parent loan must be at arm’s length, three things follow that did not follow before.
It is an international transaction for transfer pricing. Interest paid to an associated enterprise falls within the transfer pricing provisions and is reported. The rate must be supportable by a benchmarking analysis, not by reference to a regulatory ceiling — see transfer pricing for Indian subsidiaries.
The whole arrangement is tested, not just the rate. Arm’s length means what an independent lender would have agreed — which covers tenor, security, covenants, currency, subordination and whether an unrelated lender would have lent at all on those terms to a borrower with this balance sheet.
The documentation has to exist before the money moves. A loan agreement written after the fact, to support a rate chosen after the fact, is what an adjustment looks like in the making.
4.2 How to benchmark it
The practical approach is a credit-based analysis: what would a third-party lender charge this borrower, standalone, without parent support?
| Input | Why it matters |
|---|---|
| Standalone credit profile of the Indian borrower | Not the group’s rating — the subsidiary’s own |
| Currency of the loan | An INR loan and a USD loan to the same borrower are not the same price |
| Tenor | Longer money costs more |
| Security and ranking | Unsecured and subordinated debt prices above secured senior debt |
| Comparable market data | Third-party loan or bond data for similar credits and tenors |
| Date of the analysis | Pricing is a point-in-time judgment; document when it was made |
4.3 The rate that is too low
Groups instinctively price parent loans low, or at zero, on the view that it is internal money and a lower rate means less cash leaving India.
Under an arm’s length standard that is not automatically safe. A rate materially below market is as much a deviation from arm’s length as a rate above it, and it can be adjusted upward — increasing taxable interest income in the lender’s hands or triggering a corresponding adjustment.
An interest-free parent loan is not a conservative position. It is an unbenchmarked one.
5. Eligible borrowers and recognised lenders
The Amended Regulations made substantial changes to eligible borrowers, recognised lenders, applicable end uses, minimum average maturity requirements and pricing norms.
5.1 The FATF change
The requirement for lenders to be from a Financial Action Task Force or International Organization of Securities Commissions compliant jurisdiction has been removed.
This is a genuine liberalisation for groups with holding structures in jurisdictions that did not meet the old test. It removes a threshold question that previously blocked some intra-group lending outright.
Note what it does not remove: your AD bank’s own risk assessment of the lender and the group structure, and the Press Note 3 analysis where any part of the chain touches a land border country.
5.2 Confirm eligibility for your sector
Eligibility is defined by category rather than by a single universal rule, and the amendment restructured it. Confirm that your Indian entity’s activity falls within the eligible borrower definition before documenting anything, particularly in regulated sectors.
6. Minimum average maturity
The minimum average maturity period for ECBs has been standardised to 3 years, doing away with the multi-tiered MAMP structure where certain end-uses, such as working capital and general corporate purposes, attracted longer requirements.
The longer tenor requirements of 7 and 10 years have been dropped.
6.1 The manufacturing relaxation
A relaxation has been provided for manufacturing companies, where MAMP may range between 1 and 3 years for outstanding ECBs up to USD 150 million.
For a foreign manufacturer funding an Indian plant’s working capital, this matters. Short-tenor money was previously difficult; it is now available within a defined envelope.
6.2 The exceptions
There are exceptions to the minimum average maturity requirements, the key ones being repayment from foreign equity raising and acquisition of control of the borrower.
6.3 “Average” maturity, not tenor
A recurring misunderstanding. MAMP is the weighted average life of the borrowing, not its final maturity date.
A loan with a five-year final maturity but heavy early amortisation can have an average maturity below three years and fail the test. Model the repayment schedule against MAMP before agreeing it, not after.
7. The borrowing limit
The borrowing limit has been increased to the higher of: outstanding ECB up to USD 1 billion; or total outstanding borrowings, external and domestic, up to 300% of the borrower’s net worth as per the last audited balance sheet.
The borrowing limit applies at the borrower level, not the lender level. The total ECB raised by a borrower from all lenders is aggregated for determining compliance.
7.1 Read the second limb carefully
The 300% test counts total outstanding borrowings, external and domestic — not just ECB.
An Indian subsidiary with a working capital facility from an Indian bank consumes headroom under this limb. A group planning a parent loan should compute the position on total debt, not on the intended ECB alone.
7.2 The net worth problem for a young subsidiary
The limb is calculated on net worth per the last audited balance sheet. A subsidiary incorporated eighteen months ago with modest paid-up capital and accumulated losses has very little net worth — and 300% of very little is still very little.
For an early-stage entity, the USD 1 billion limb is academic and the net worth limb is binding. Which is a reason to size the equity infusion with the intended debt in mind, rather than funding minimally on equity and expecting debt to fill the gap.
8. End-use
RBI permits ECB for working capital, general corporate purposes, and repayment of rupee loans in certain cases, particularly where the prescribed minimum average maturity period and other applicable conditions are satisfied. Refinancing of existing ECB is also permitted subject to prescribed conditions.
There continue to be some restrictions on end-use.
8.1 State the end-use and then honour it
The end-use is declared when the loan is registered. Applying the funds to something else afterwards is a contravention even where the alternative use would itself have been permitted.
For a group whose plans may evolve, the practical answer is to declare an end-use broad enough to cover the realistic range and to keep evidence of application — rather than declaring narrowly and redeploying quietly.
9. Registration and reporting
| Step | What happens |
|---|---|
| Loan agreement | Executed, with terms tested against MAMP, end-use and the arm’s length analysis |
| Form ECB | Submitted through the AD bank to obtain a Loan Registration Number |
| LRN | No drawdown before it is issued |
| Drawdown | Funds received through the AD bank |
| Form ECB-2 | Cashflow-based rather than monthly under the amended regulations |
| Changes to terms | AD bank no-objection certificates no longer required for creation of security, changes to ECB terms, or transfer of ECBs by lenders |
9.1 The LRN is the gate
No money should move before the Loan Registration Number is issued. A drawdown received in advance of registration is a contravention from the first day, and it is one of the more common ways a well-intentioned parent loan goes wrong — the parent wires funds because the subsidiary needs them, and the paperwork follows.
9.2 The reporting change cuts both ways
Form ECB-2 moving from monthly to cashflow-based is a real reduction in administrative load. It also removes the monthly rhythm that reminded someone the obligation existed.
A filing tied to cashflow events needs a trigger in the finance calendar, or it becomes a filing nobody remembers because nothing prompts it.
10. Grandfathering
ECBs for which a Loan Registration Number had been obtained prior to the coming into force of the amended regulations continue to be governed by the regulations applicable at the time of obtaining the LRN. However, reporting requirements for such ECBs are governed by the amended regulations.
That split is easy to get wrong. An existing loan keeps its old substantive terms — its MAMP, its cost ceiling, its end-use conditions — but moves to the new reporting regime.
A group with a 2023 parent loan is therefore running two frameworks at once: old substance, new reporting. Check both rather than assuming the loan is entirely grandfathered or entirely converted.
11. The tax layer FEMA does not mention
Compliance with the ECB framework does not make the interest deductible. Two Indian tax provisions constrain a parent loan independently.
11.1 Thin capitalisation
Where an Indian company pays interest exceeding ₹1 crore in a year to a non-resident associated enterprise, the deductible amount is restricted to 30% of earnings before interest, taxes, depreciation and amortisation. The provision also catches debt from an unrelated lender where an associated enterprise provides an implicit or explicit guarantee.
Disallowed interest can generally be carried forward for a limited number of years.
The practical effect is a ceiling that FEMA says nothing about. A loan sized comfortably within the 300% net worth limb can still produce interest that is largely non-deductible if the borrower’s EBITDA is thin — which, for a young or loss-making subsidiary, it usually is.
That is the case where debt funding is least useful: the entity that most needs the money gets the least deduction for it.
11.2 The guarantee point
Groups sometimes avoid a direct parent loan by having the Indian entity borrow locally against a parent guarantee. Note that the thin capitalisation provision extends to that structure, and separately, a guarantee provided by the parent is itself a related-party transaction requiring an arm’s length guarantee fee.
Restructuring around the provision usually reproduces it.
11.3 Withholding on interest
Interest paid to a non-resident is subject to withholding, at the treaty rate where a treaty applies and the documentation is in place — Tax Residency Certificate, Form 10F, beneficial ownership declaration and the prescribed remittance forms.
Concessional withholding rates apply to certain categories of external borrowing subject to conditions. Confirm whether your loan qualifies before assuming the rate, and see TDS on payments to your foreign parent.
12. Converting the loan to equity
A common endgame, and it works — but it becomes an FDI transaction at the point of conversion.
Conversion of ECB into equity requires that the resulting equity holding is within the sectoral cap, if any, and that the pricing of shares is as per the applicable provisions. The conversion facility is available for ECB availed under the Automatic or Government Route and applies to ECB whether or not due for payment, as well as to secured and unsecured loans availed from non-resident collaborators.
Three consequences.
FEMA pricing applies at conversion. Shares issued must be at or above fair market value on a valuation valid at that date — the same 90-day rule that governs any allotment.
The sectoral cap is tested post-conversion. A conversion that would push foreign holding beyond the permitted cap does not work.
Reporting follows. The allotment is reported through the FDI reporting framework, and the ECB is reported as extinguished.
Plan the conversion at the point the loan is documented, not when repayment falls due — because a loan drafted without a conversion mechanic may need amending at exactly the moment the parties have least flexibility.
13. Two situations, worked through
Scenario A — The advance that became an unregistered borrowing
A European group’s Indian subsidiary is short of cash in its first year. The parent pays the Indian landlord and two vendors directly, and the finance team records the amounts in an intercompany payable.
Two years later. The balance stands at a substantial figure. There is no loan agreement, no LRN, no ECB-2 filing, and no stated maturity or rate.
The position. In substance, an obligation of the Indian entity to a non-resident — a borrowing, without any of the compliance a borrowing requires.
Where it surfaces. Diligence, as an unexplained non-resident liability; or at the strike-off stage, where an intercompany payable is a liability that blocks the application — see closing down an Indian subsidiary.
What would have prevented it. Deciding at the outset whether the support was equity, a documented loan, or a recharge for services — and treating it as that thing consistently.
Scenario B — The interest-free loan that was adjusted
A parent lends its Indian subsidiary funds at zero interest, reasoning that charging interest would only move cash out of India and create withholding.
The problem. Related-party ECBs must be at arm’s length, and a benchmarking analysis would not support a zero rate for an unsecured loan to a standalone borrower of this credit quality.
The outcome. A transfer pricing adjustment imputing interest income, with the associated consequences — on a transaction the group entered into specifically to keep things simple.
The lesson. Interest-free is not conservative. It is unbenchmarked, and a rate you cannot support in either direction is the exposure.
14. Twelve mistakes
- Working from all-in-cost ceilings. They were removed in February 2026, and the LIBOR-based figures still circulating were stale well before that.
- Reading “ceilings abolished” as “price freely”. What was abolished was the safe harbour; the arm’s length test replaced it.
- Treating a parent loan as a compliance filing rather than a related-party transaction requiring benchmarking.
- Lending interest-free on the view that it is conservative.
- Letting parent-paid vendor invoices sit in an intercompany account, creating an unregistered borrowing.
- Drawing funds before the LRN is issued.
- Confusing average maturity with final maturity, so front-loaded amortisation breaches MAMP.
- Computing the 300% limb on ECB alone, when it counts total external and domestic borrowings.
- Assuming a young subsidiary has borrowing headroom, when 300% of a thin net worth is a small number.
- Ignoring thin capitalisation, so interest is compliant under FEMA and largely non-deductible under tax law.
- Restructuring into a locally borrowed, parent-guaranteed facility without noticing the provision extends to it and the guarantee needs its own fee.
- Assuming an existing loan is entirely grandfathered. Old substance, new reporting.
15. Checklist
Before documenting
- Confirmed the funding is a loan rather than equity, trade credit or a service recharge
- Indian entity confirmed as an eligible borrower for its activity and sector
- Lender eligibility confirmed, and Press Note 3 analysis run where the chain touches a land border country
- Borrowing headroom computed on total external and domestic borrowings against 300% of net worth per the last audited balance sheet
- Repayment schedule modelled against the 3-year MAMP on a weighted average basis
- End-use identified and stated broadly enough to cover the realistic range
- Arm’s length benchmarking completed on the borrower’s standalone credit, with the analysis dated
- Thin capitalisation modelled against projected EBITDA
- Withholding rate established, with treaty documentation identified
- Conversion-to-equity mechanic considered and drafted in
Execution
- Loan agreement executed before any funds move
- Form ECB filed through the AD bank
- LRN obtained before drawdown
- Funds received through the AD bank against the registered facility
Ongoing
- Form ECB-2 filed on the cashflow-based cycle, with a calendar trigger since the monthly rhythm has gone
- End-use evidence retained and consistent with the declaration
- Interest withheld at the correct rate, with TRC and Form 10F current for each period
- Transfer pricing documentation covering the interest, and Form 3CEB reporting
- Benchmarking refreshed where terms change or the loan is extended
- Grandfathering position tracked for pre-February 2026 loans — old substance, new reporting
Planning to fund your Indian entity with debt?
Since February 2026 the rate is no longer set by a ceiling you can point to — it has to be benchmarked like any other related-party transaction, and the interest may not be deductible even when the loan is compliant. Tell us the amount, the tenor and your Indian entity’s balance sheet and we will tell you the headroom, the maturity constraint, what the rate needs to support, and how much of the interest you will actually deduct.
16. Frequently asked questions
Q1. Is a loan from a foreign parent to its Indian subsidiary an ECB?
Yes. External commercial borrowing is a loan raised by an eligible Indian entity from a recognised non-resident lender under FEMA. Money advanced by an overseas parent, repayable by the Indian subsidiary, is exactly that. Describing it as an intercompany advance or working capital support does not change its character.
Q2. What changed in February 2026?
The Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 were issued on 9 February and took effect on 16 February 2026. They removed all-in-cost ceilings, standardised minimum average maturity at three years, raised the borrowing limit, removed the FATF and IOSCO lender jurisdiction requirement, made Form ECB-2 cashflow-based, and abolished the “foreign equity holder” concept.
Q3. Are all-in-cost ceilings still in force?
No. The construct was removed and replaced with “cost of borrowing”, which must be in line with prevailing market conditions. Cost of borrowing covers interest, fees, expenses, charges, guarantee fees, commitment fees and statutory taxes payable in India. Guidance quoting a spread over LIBOR is doubly out of date — the benchmark and the ceiling have both gone.
Q4. Does that mean we can set any interest rate we like?
No, and this is the most consequential misreading. What was removed was a safe harbour. The 2026 Regulations added a requirement that ECBs from related parties be on an arm’s length basis, so the rate must now be justified as what an unrelated lender would have charged this borrower — a benchmarking exercise rather than a compliance box.
Q5. What happened to the “foreign equity holder” concept?
It was abolished. Previously a parent lending to its subsidiary fell into that defined category with its own rules. Now the relationship is addressed through the general arm’s length requirement for related-party ECBs, which pulls the transaction into transfer pricing rather than leaving it as a FEMA category.
Q6. What does the arm’s length requirement actually test?
The whole arrangement, not just the rate. Arm’s length means what an independent lender would have agreed, covering tenor, security, ranking, covenants, currency, subordination and whether an unrelated lender would have lent at all on those terms to a borrower with this balance sheet.
Q7. Can we make the loan interest-free?
It is not the conservative option it appears to be. A rate materially below market deviates from arm’s length just as a rate above it does, and can be adjusted upward with the associated tax consequences. An interest-free parent loan is an unbenchmarked position rather than a safe one.
Q8. What is the minimum average maturity now?
Standardised at three years, with the earlier multi-tiered structure removed and the seven and ten year requirements dropped. Manufacturing companies have a relaxation allowing MAMP between one and three years for outstanding ECBs up to USD 150 million. Exceptions exist, notably for repayment from foreign equity raising and acquisition of control of the borrower.
Q9. Is minimum average maturity the same as the loan’s tenor?
No, and confusing them causes real breaches. MAMP is the weighted average life of the borrowing, not the final maturity date. A loan with a five-year final maturity but heavy early amortisation can have an average maturity below three years and fail. Model the repayment schedule against MAMP before agreeing it.
Q10. How much can our Indian entity borrow?
The higher of outstanding ECB up to USD 1 billion, or total outstanding borrowings — external and domestic — up to 300% of net worth per the last audited balance sheet. The limit applies at borrower level, so ECB from all lenders is aggregated.
Q11. Does a domestic bank facility reduce our ECB headroom?
Under the 300% limb, yes. That test counts total outstanding borrowings, external and domestic, not ECB alone. A working capital facility from an Indian bank consumes headroom, so compute the position on total debt rather than on the intended ECB.
Q12. Our subsidiary is new with little net worth. Can it still borrow?
Only within the limits its balance sheet supports. For an early-stage entity the USD 1 billion limb is academic and the net worth limb binds — and 300% of a small net worth is a small number. This is a reason to size the equity infusion with the intended debt in mind rather than funding minimally on equity.
Q13. Do lenders still need to be in a FATF-compliant jurisdiction?
No. That requirement was removed by the 2026 amendment, which is a genuine liberalisation for groups with holding structures in jurisdictions that failed the old test. It does not remove your AD bank’s own risk assessment, or the Press Note 3 analysis where any part of the ownership chain touches a land border country.
Q14. When do we need the Loan Registration Number?
Before any drawdown. Form ECB is submitted through the AD bank and the LRN issued; no money should move before it. Funds received in advance of registration are a contravention from the first day, and it is a common failure — the parent wires money because the subsidiary needs it and the paperwork follows.
Q15. How often is Form ECB-2 filed now?
It has moved from monthly to cashflow-based under the amended regulations. That is a genuine reduction in administrative load, but it removes the monthly rhythm that reminded someone the obligation existed, so the filing needs a trigger in the finance calendar.
Q16. Do we still need AD bank NOCs to change loan terms?
No. The amendment removed the requirement for no-objection certificates from designated AD banks for creation of security, changes to the terms of the ECB, and transfer of ECBs by lenders.
Q17. Is our existing 2023 parent loan grandfathered?
Partly. ECBs for which an LRN was obtained before the amendment took effect continue to be governed by the regulations applicable when the LRN was obtained — but reporting requirements are governed by the amended regulations. So an existing loan runs old substance with new reporting, and both need checking.
Q18. Is the interest deductible in India?
Not necessarily in full. Where an Indian company pays interest exceeding ₹1 crore in a year to a non-resident associated enterprise, the deduction is restricted to 30% of EBITDA, with disallowed interest generally carried forward for a limited period. A loan sized comfortably within the FEMA limit can still produce largely non-deductible interest where EBITDA is thin.
Q19. Can we avoid that by borrowing locally against a parent guarantee?
Generally not. The thin capitalisation provision extends to debt from an unrelated lender where an associated enterprise provides an implicit or explicit guarantee. Separately, the guarantee is itself a related-party transaction requiring an arm’s length guarantee fee. Restructuring around the provision usually reproduces it.
Q20. What withholding applies to the interest?
Interest paid to a non-resident is subject to withholding, at the treaty rate where a treaty applies and the documentation is in place — Tax Residency Certificate, Form 10F, beneficial ownership declaration and the prescribed remittance forms. Concessional rates apply to certain categories of external borrowing subject to conditions, so confirm whether your loan qualifies rather than assuming.
Q21. Can the loan be converted into equity later?
Yes, subject to conditions. The resulting equity holding must be within the sectoral cap and the shares priced under the applicable provisions, meaning FEMA pricing and a valuation valid at the conversion date. The facility applies to ECB whether or not due for payment, and to secured and unsecured loans from non-resident collaborators. Draft the conversion mechanic when the loan is documented.
Q22. What if the parent has been paying our Indian vendors directly?
Then in substance the Indian entity owes a non-resident, which is a borrowing without the registration, reporting or maturity a borrowing requires. Left in an intercompany account it surfaces in diligence as an unexplained non-resident liability, and it also blocks a strike-off later. Decide at the outset whether the support is equity, a documented loan or a service recharge, and treat it as that consistently.
Related reading
- Transfer pricing for Indian subsidiaries — the benchmarking your loan rate now depends on
- Share valuation for FDI — the pricing rules that apply if you convert the loan to equity
- Repatriating profits from India — interest as a cash-out route alongside dividend and royalty
- TDS on payments to your foreign parent — withholding on the interest
Talk to us before the money moves
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. ECB structuring and registration, arm’s length benchmarking, thin capitalisation modelling, withholding and remittance documentation, and conversion to equity — run as one workstream, because the loan has to work under FEMA, transfer pricing and income tax simultaneously.
How we usually start. Tell us the amount, the tenor, your Indian entity’s last audited balance sheet and its projected EBITDA. We come back with the borrowing headroom, the maturity constraint, what the rate has to support, how much interest you will actually deduct, and whether equity is the better instrument.