# External Commercial Borrowing from a Foreign Parent in India (2026)

> Source: https://krystal7.com/insights/ecb-loan-from-foreign-parent-india
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: Nihal Srivastava
> Published: 25 Aug 2026; updated 01 Oct 2026
> Summary: From 16 Feb 2026, a foreign parent loan to an Indian subsidiary needs an LRN before drawdown, a three year average maturity and Form ECB 2 filings.

*Written by Nihal Srivastava, Krystal7 Consultants. Last updated 27 September 2026.*

**A loan from a foreign parent to its Indian subsidiary is an external commercial borrowing (ECB). Since 16 Feb 2026, Schedule I to the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 governs it, as rewritten by Notification No. FEMA 3(R)(5)/2026-RB of 9 Feb 2026. The subsidiary files Form ECB 1 for a Loan Registration Number before drawdown. The loan needs a three year minimum average maturity and an arm's length cost. Form ECB 2 is due within seven calendar days after each month with a drawdown or debt servicing.**

This page covers limits, end uses, reporting, late fees, conversion, tax, transfer pricing and DPT-3. INR 1,00,00,000 is one crore (10 million).

## What is an external commercial borrowing (ECB) in 2026?

An ECB is a borrowing by an eligible borrower from a recognised lender under Schedule I to the Borrowing and Lending Regulations. Notification No. FEMA 3(R)(5)/2026-RB of 9 Feb 2026 replaced that Schedule. It took effect on publication in the Official Gazette on 16 Feb 2026.

Paragraph 4 covers any commercial borrowing with agreed interest, "if any", and repayment of principal. It excludes trade credit of up to three years, export advances and investments under the Debt Instruments Regulations. It also excludes convertible notes under the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 (NDI Rules).

Until 15 Feb 2026, the rules sat in Part I of RBI's ECB Master Direction of 26 Mar 2019. A.P. (DIR Series) Circular No. 22 of 16 Feb 2026 deleted that Part.

| Item | Rule from 16 Feb 2026 | Where it sits |
|---|---|---|
| Legal basis | Borrowing and Lending Regulations, 2018, as amended in 2026 | Notification No. FEMA 3(R)(5)/2026-RB |
| Eligible borrower | Any resident person, other than an individual, set up under a Central or State Act | Schedule I, paragraph 1 |
| Recognised lender | Any person resident outside India; an overseas branch of an RBI regulated lender; an IFSC financial institution | Schedule I, paragraph 2 |
| Currency | Foreign currency or Indian rupees | Schedule I, paragraph 3 |
| Borrowing limit | Higher of USD 1 billion of outstanding ECB, or total borrowing up to 300% of net worth | Schedule I, paragraph 5 |
| Minimum average maturity | Three years; one to three years for manufacturing borrowers, up to USD 150 million outstanding | Schedule I, paragraph 6 |
| Cost | Market conditions; trade credit ceiling when average maturity is under three years | Schedule I, paragraph 7 |
| Related party lender | Arm's length basis | Schedule I, paragraph 9 |
| Drawdown | Only after the Loan Registration Number (LRN) | Schedule I, paragraph 10 |
| End use | Nine barred uses | Regulation 3A |
| Conversion to equity | Allowed, subject to the NDI Rules | Schedule I, paragraph 13 |
| Reporting | Form ECB 1 before drawdown; Revised Form ECB 1 and Form ECB 2 within 7 calendar days after month end | Schedule I, paragraph 16 |
| Late submission fee (INR) | 7,500 flat for Form ECB 1; 7,500 plus 0.025% × A × n for each late Form ECB 2 | Circulars No. 16 (2022) and No. 25 (2026) |

## Can a foreign parent lend to its Indian subsidiary?

Yes. Paragraph 2 of Schedule I makes any person resident outside India a recognised lender. A foreign parent, a sister company, an individual shareholder or a fund abroad all qualify. The subsidiary is an eligible borrower because it is incorporated under the Companies Act, 2013. Paragraph 1 adds one condition: the law that governs the borrower must permit it to raise ECB.

The 2019 lender tests are gone. The lender no longer needs to sit in a FATF or IOSCO compliant country. An individual no longer needs to hold 25 percent of the borrower directly or 51 percent indirectly.

| Party | Eligible in 2026? | Condition or note |
|---|---|---|
| Foreign parent company | Yes, as a lender | Related party, so the loan must be at arm's length (paragraph 9) |
| Sister company or group finance company abroad | Yes, as a lender | Same arm's length rule if it is a related party |
| Foreign individual shareholder or director | Yes, as a lender | No foreign equity holder test any more |
| Overseas branch of an Indian bank | Yes, as a lender | Only a branch of an entity whose lending business RBI regulates |
| Financial institution in an IFSC | Yes, as a lender | Institution or branch set up in an IFSC |
| Indian Private Limited company | Yes, as a borrower | Incorporated under the Companies Act, 2013 |
| Indian LLP | Yes, as a borrower | Registered under the Limited Liability Partnership Act, 2008 |
| Resident individual | No | Paragraph 1 excludes individuals |
| Borrower under restructuring or insolvency | Only if the plan permits | Paragraph 1(2) |
| Borrower under investigation | Yes | Must disclose the proceedings in Form ECB 1 (paragraph 1(3)) |

## Which RBI instruments govern ECB after February 2026?

Seven RBI instruments shape a parent loan today. RBI first announced the review in its Statement on Developmental and Regulatory Policies of 1 Oct 2025.

| Instrument | Date | What it does |
|---|---|---|
| Notification No. FEMA 3(R)(5)/2026-RB | 9 Feb 2026, in force 16 Feb 2026 | Inserts regulation 3A on end use and a new Schedule I on ECB |
| A.P. (DIR Series) Circular No. 22 | 16 Feb 2026 | Deletes paragraphs 1 to 12 of the ECB Master Direction and Part I of the ECB FAQs |
| A.P. (DIR Series) Circular No. 23 | 18 Feb 2026 | Substitutes the Form ECB 1 and Form ECB 2 formats |
| A.P. (DIR Series) Circular No. 25 | 30 Mar 2026, effective 1 Apr 2026 | Changes the late submission fee and sets the AD bank's 7 day forwarding time |
| A.P. (DIR Series) Circular No. 21 | 8 Sep 2026 | Withdraws five old ECB circulars of 2012 to 2015 |
| Master Direction on ECB, Trade Credits and Structured Obligations | Updated as on 8 Sep 2026 | Keeps only the trade credit framework in Part II |
| Master Direction on Reporting under FEMA | Updated as on 23 Sep 2026 | Holds the Form ECB 1 and Form ECB 2 formats in Part V |

An ECB with an LRN obtained before the amendment keeps the terms that applied then. Its reporting follows the 2026 rules.

## What limits apply to amount, maturity and cost?

An eligible borrower may raise ECB up to the higher of USD 1 billion outstanding, or total borrowing of 300 percent of net worth. The minimum average maturity is three years. The cost must match market conditions, and a related party loan must be at arm's length. Only an ECB with average maturity under three years faces a numeric cost ceiling.

### The borrowing limit

Paragraph 5 counts all outstanding borrowing, external and domestic, against 300 percent of net worth in the last audited standalone balance sheet. Non fund based credit and securities mandatorily convertible into equity are left out. A subsidiary with small or negative net worth can still use the USD 1 billion leg.

### The minimum average maturity period

Paragraph 6 sets a minimum average maturity period (MAMP) of three years. A manufacturing borrower may also borrow for one to three years, up to USD 150 million of such ECB outstanding. Call and put options cannot be exercised before the MAMP ends.

Annex I to the amending regulations illustrates the computation. The table below weights each repayment by its share of principal and its time from drawdown; check your schedule against Annex I.

| Repayment profile for USD 1 million | Calculation | Average maturity (years) | Meets the three year MAMP? |
|---|---|---|---|
| Single repayment at the end of year 3 | 1.00 × 3 | 3.00 | Yes |
| Three equal repayments at the end of years 1, 2 and 3 | (1 + 2 + 3) ÷ 3 | 2.00 | No, unless the manufacturing window applies |
| 50% at the end of year 2, 50% at the end of year 4 | 0.5 × 2 + 0.5 × 4 | 3.00 | Yes |
| Three equal repayments at the end of years 3, 4 and 5 | (3 + 4 + 5) ÷ 3 | 4.00 | Yes |

Paragraph 6 waives the MAMP on conversion into non debt instruments, repayment from equity money, refinancing, a lender's waiver and corporate actions.

### The cost of borrowing

Regulation 2 counts interest, fees, expenses, guarantee fees and export credit agency charges as cost, but not commitment fees or statutory taxes payable in India. Paragraph 7 requires a cost "in line with prevailing market conditions". Paragraph 9 requires arm's length terms from a related party.

An ECB with average maturity under three years must also meet the trade credit cost ceiling. Paragraph 14 of Part II of the Master Direction, updated as on 8 Sep 2026, sets it. The ceiling is the benchmark plus 300 basis points for new foreign currency trade credit and plus 250 basis points for rupee trade credit.

The benchmark is a 6 month interbank or alternative reference rate for foreign currency, and the matching Government of India security yield for rupees. For a US dollar loan, we use 6 month term SOFR.

| Parameter | 2019 framework (to 15 Feb 2026) | 2026 framework (from 16 Feb 2026) |
|---|---|---|
| Borrowing limit | USD 750 million per financial year, automatic route | Higher of USD 1 billion outstanding or 300% of net worth |
| Debt to equity test on a parent loan | ECB liability to equity ratio of 7:1 above USD 5 million outstanding | None beyond the net worth limit |
| General MAMP | 3 years | 3 years |
| Short maturity for manufacturers | 1 year, up to USD 50 million per financial year | One to three years, up to USD 150 million outstanding |
| Parent loan for working capital, general corporate purposes or rupee loan repayment | 5 years | 3 years |
| Other lenders, working capital or general corporate purposes | 10 years | 3 years |
| Other lenders, repayment of rupee loans taken for capital expenditure | 7 years | 3 years |
| Cost ceiling, foreign currency | Benchmark plus 500 bps for new ECBs | Market conditions; arm's length |
| Cost ceiling, rupee ECB | Benchmark plus 450 bps | Market conditions; arm's length |
| Cost ceiling, average maturity under 3 years | Not applicable | Trade credit ceiling |

## What can the ECB money be used for?

A 2026 ECB can fund anything except the nine uses that regulation 3A bars in India. Working capital, salaries, capital expenditure, general corporate purposes and repayment of a clean rupee loan are all open. Before 16 Feb 2026, a parent loan for these needed a five year average maturity.

| Use of the loan | Position from 16 Feb 2026 | Rule |
|---|---|---|
| Working capital, salaries, rent, vendor payments | Permitted | Not listed in regulation 3A |
| General corporate purposes | Permitted | Not listed in regulation 3A |
| Plant, equipment, office fit out and other capital expenditure | Permitted | Not listed in regulation 3A |
| Repayment of a domestic rupee loan | Permitted, unless that loan funded a barred use or is a non performing asset | 3A(1)(h) |
| Lending on to a group company | Permitted, unless the money goes to a barred use | 3A(1)(i) |
| Chit funds | Barred | 3A(1)(a) |
| Nidhi company | Barred | 3A(1)(b) |
| Real estate business and farmhouses | Barred; the definition excludes industrial parks, townships, SEZs, infrastructure and own use property | 3A(1)(c) |
| Agriculture and animal husbandry | Barred, with listed exceptions such as floriculture, horticulture, seeds, aquaculture and agro services | 3A(1)(d) |
| Plantation | Barred, except tea, coffee, rubber, cardamom, palm oil tree and olive oil tree | 3A(1)(e) |
| Trading in transferable development rights | Barred | 3A(1)(f) |
| Transactions in listed or unlisted securities | Barred, except strategic corporate actions such as a merger or acquisition of control | 3A(1)(g) |

The Explanation to clause (g) limits securities deals to strategic purposes, so parking the money in mutual funds is barred. The real estate definition excludes own use property, so buying or leasing the subsidiary's office is fine. Under paragraph 10, rupee proceeds must reach an INR account with the AD bank by the end of the month after receipt.

## How do you get a Loan Registration Number?

The subsidiary files Form ECB 1 through its designated AD Category I bank, which certifies it and sends it to RBI. RBI then allots the Loan Registration Number (LRN), and paragraph 10 bars any drawdown before it. Form ECB 1 was called Form ECB before 2026.

Before filing, the board approves the borrowing at a meeting under section 179(3)(d) of the Companies Act, 2013. MCA notification G.S.R. 464(E) of 5 Jun 2015 exempts private companies from section 180, so large borrowings need no special resolution. A secured loan needs its charge registered within 30 days under section 77. Paragraph 11 bars RBI regulated entities from guaranteeing an ECB.

The AD bank has seven calendar days to send a complete return to RBI under Circular No. 25. No time is set for RBI to allot the LRN, so we build a buffer into the drawdown date. The LRN can be cancelled only before any drawdown. We file these returns as part of our [FEMA compliance work](/services/fema-compliances.html).

## What is the ECB 2 return and when is it due?

Form ECB 2 reports the receipt of ECB proceeds and each debt servicing payment. The borrower files it through the designated AD bank within seven calendar days from the end of the month of the drawdown or payment. Under the 2019 framework, it was a monthly return due within seven working days.

Neither paragraph 16 nor RBI's list of returns says whether an idle month needs a nil return. Ask the AD bank and keep its reply. Revised Form ECB 1 reports a change in any parameter, such as the rate or tenor. It is due within seven calendar days after the month of the change.

| Filing | What it reports | Due date | Filed through | LSF class from 1 Apr 2026 |
|---|---|---|---|---|
| Form ECB 1 | Loan details, to obtain the LRN | Before drawdown | Designated AD Category I bank | Non flow return |
| Revised Form ECB 1 | Change in any ECB parameter | 7 calendar days from the end of the month the change took effect | Designated AD Category I bank | Non flow return |
| Form ECB 2 | Drawdown and debt servicing | 7 calendar days from the end of the month of the receipt or payment | Designated AD Category I bank | Flow return, each late return a separate instance |
| Forwarding to RBI | Complete return with the bank's certification | 7 calendar days from the bank's receipt | AD bank to RBI | Not applicable |
| Form FC-GPR | Shares or CCDs issued on conversion of the ECB | 30 days from the issue | FIRMS portal, through the AD bank | Flow return |

## What happens if ECB reporting is late?

A late Form ECB 1, Revised Form ECB 1 or Form ECB 2 attracts a late submission fee (LSF) under A.P. (DIR Series) Circular No. 16 of 30 Sep 2022. Circular No. 25 of 30 Mar 2026 changed it from 1 Apr 2026. Form ECB 1 returns now pay INR 7,500 flat. Each late Form ECB 2 pays INR 7,500 plus 0.025 percent of the amount for each year of delay.

In that formula, "A" is the amount involved and "n" is the delay in years, rounded up to the nearest month. Note (d) caps the fee at 100 percent of A and rounds it upwards to the nearest hundred. The borrower pays the RBI Regional Office by NEFT or RTGS after RBI's acknowledgement email.

| Point | Before 1 Apr 2026 | From 1 Apr 2026 |
|---|---|---|
| Form ECB 1 or Revised Form ECB 1 filed late (INR) | 7,500 + (0.025% × A × n) | 7,500 flat |
| Form ECB 2 filed late (INR) | 7,500 + (0.025% × A × n) | 7,500 + (0.025% × A × n) |
| Fixed INR 7,500 for several late ECB 2 returns under one LRN | Charged once | Charged for each late return |
| Cap | 100% of A | 100% of A |
| Delay factor n | Years, rounded up to the next month, two decimals | Same |
| Window to use LSF | 3 years from the due date | 3 years from the due date |

After three years, the borrower must compound under section 15 of FEMA, as must a borrower that drew down before the LRN. Our [FEMA compounding guide](/insights/fema-compounding-application-a-complete-guide-to-resolving-fema-contraventions-in-2026) covers that route. Neither circular names the exchange rate for converting a dollar A into rupees; RBI's email states the fee.

## Can the ECB convert into equity later?

Yes. Paragraph 13 of Schedule I lets a borrower convert an ECB into non debt instruments under the NDI Rules, even after it matures unpaid. The MAMP does not apply to a conversion. The shares go to FC-GPR within 30 days of issue. Paragraph 13 sets five conditions:

1. The lender gets no extra payment for enabling the conversion.
2. The lender consents.
3. Other lenders consent, or receive information about the conversion.
4. Prudential rules apply if RBI regulated entities also lend to the borrower.
5. The exchange rate is the one on the date of the conversion agreement, or one giving a lower rupee liability.

The issue must fit the sector's entry route and cap. An unlisted company cannot price the shares below fair value under rule 21 of the NDI Rules. A parent in a land border country may need Government approval. A Cabinet decision of 10 Mar 2026 keeps non controlling beneficial ownership up to 10 percent on the automatic route.

Under section 62(3) of the Companies Act, 2013, a conversion option approved by special resolution before the loan avoids a fresh preferential offer. File [PAS-3](/insights/pas-3-return-of-allotment-foreign-investors) and [FC-GPR](/insights/fc-gpr-filing-timeline-and-process-for-foreign-founders) within 30 days, the latter under regulation 4(1) of FEMA 395/2019-RB. Ask the AD bank how the conversion should appear in the ECB returns.

## How is interest on a parent loan taxed in India?

The Indian subsidiary withholds tax under section 393(2) of the Income Tax Act, 2025, Table serial 17, at the rates in force. For interest on a foreign currency loan, section 207(1) Table serial 3 sets 20 percent, plus surcharge and 4 percent cess. A lower treaty rate applies under section 159 when the parent gives a tax residency certificate (TRC) and Form 41.

Serial 2 of the same Table keeps the 5 percent rate of old section 194LC. It applies only to loan agreements made between 1 Jul 2012 and 1 Jul 2023. Interest on a rupee ECB falls outside serial 3 of section 207(1). It takes the 35 percent rate for "any other income" of a foreign company in the Finance Act, 2026, plus surcharge and cess.

### Treaty rates for common parent countries

We read each rate from the treaty text on incometaxindia.gov.in. The cap applies only if the parent is the beneficial owner.

| Parent country | Article | Treaty cap on interest to a group company lender | Domestic rate on a foreign currency loan |
|---|---|---|---|
| United States | 11(2)(b) | 15% | 20% plus surcharge and cess |
| United Kingdom | 12(2) | 15% | 20% plus surcharge and cess |
| Singapore | 11(2)(b) | 15% | 20% plus surcharge and cess |
| United Arab Emirates | 11(2)(b) | 12.5% | 20% plus surcharge and cess |
| Canada | 11(2) | 15% | 20% plus surcharge and cess |
| Germany | 11(2) | 10% | 20% plus surcharge and cess |
| Japan | 11(2) | 10% | 20% plus surcharge and cess |
| Netherlands | 11(2) | 10% | 20% plus surcharge and cess |
| France | 12(2) | 10% | 20% plus surcharge and cess |
| Mauritius | 11(2) | 7.5% | 20% plus surcharge and cess |

Bank lenders get lower caps under some treaties, but a parent does not qualify. Article 11(7) of the India US treaty limits relief to an arm's length amount of interest. We apply a treaty rate without surcharge or cess, as tribunal rulings allow; no CBDT circular settles the point. The domestic rate carries a 2 percent surcharge above INR 1 crore and 5 percent above INR 10 crore.

### How the withholding works

| Step | Rule | Timing |
|---|---|---|
| Deduct tax | Section 393(2), serial 17 | On credit of the interest to the parent's account or on payment, whichever is earlier |
| Treat a suspense or interest payable credit as a credit to the parent | Section 393(11) | Same time |
| Gross up if the subsidiary bears the tax | Section 393(10) | Same time |
| Collect TRC and Form 41 | Section 159(8); rule 75 | Form 41 once per tax year, before the first payment |
| Give name, email, phone, address, TRC and tax ID if the parent has no PAN | Section 397(2)(c); rule 217 | Before deduction, to avoid the higher rate |
| Deposit the tax | Rule 218(2) | By the 7th of the next month; 30 April for March |
| File Form 145, with Form 146 for Part C | Section 397(3)(d); rule 220 | Before each remittance |
| File the quarterly statement | Form 144 (old 27Q) | 31 Oct for the July to September quarter |
| Issue the certificate | Form 131 (old 16A), rule 215(1) | Within 15 days of the Form 144 due date |

Once the tax year's remittances cross INR 5 lakh, the subsidiary files Part C of Form 145 with a chartered accountant's Form 146. Section 462 levies INR 1,00,000 for a missing or wrong Form 145. Our guide to [Form 15CA and 15CB requirements](/insights/form-15ca-and-15cb-requirements-guide-2026) explains the parts.

A missed deduction costs three ways. Section 35(b)(ii) disallows the interest until the tax is paid. Section 398 charges interest of 1 percent a month for late deduction and 1.5 percent for late deposit. Section 448 allows a penalty equal to the tax not deducted. Our guide to [TDS on payments to non residents](/insights/tds-on-payments-to-non-residents) has the detail.

### Does the parent file an Indian tax return?

Yes, if it uses a treaty rate below 20 percent. Section 207(8) excuses a foreign company only if its income is section 207 income taxed at source at the section 207 rate or more. A 15 or 10 percent treaty rate fails that test, so the parent needs a PAN and files a return.

## How should the interest rate be priced for transfer pricing?

A parent loan is an international transaction under section 163(1)(c) of the Income Tax Act, 2025, which covers borrowing and lending. Section 161 requires arm's length interest, and the subsidiary reports the loan in Form 48 (old Form 3CEB) under section 172. FEMA adds its own test: market cost, and arm's length for a related party.

We prepare one benchmarking file for both regimes, usually under the comparable uncontrolled price method in section 165. Our note on [arm's length price methods](/insights/arms-length-price-methods-in-india) explains that choice. Safe harbour does not help. Rule 88(b) of the Income Tax Rules, 2026 covers only a loan the Indian company gives, as the Form 49 FAQs confirm.

### The section 177 interest limit

Section 177 applies once interest to a non resident associated enterprise exceeds INR 1 crore in a tax year. It disallows the excess over 30 percent of EBITDA, or the interest to associated enterprises if lower. The disallowed amount carries forward for up to eight tax years. Under section 177(2), a bank loan that the parent guarantees counts as associated enterprise debt.

| Filing or test | Rule | Due date or trigger |
|---|---|---|
| Form 48, accountant's report on international transactions | Section 172; rule 85 | One month before the return due date (30 November for a company with international transactions) |
| Transfer pricing documentation | Section 171; rule 84 | Kept for each tax year; relaxed where international transactions total INR 1 crore or less |
| Interest limit | Section 177 | Interest to non resident associated enterprises above INR 1 crore in the tax year |
| Treaty limit on related party interest | Article 11(7), India US treaty | Interest above the arm's length amount |
| Company return | Section 263 | 30 November for a company filing Form 48 |

Our guide on [Form 3CEB applicability and due dates](/insights/form-3ceb-filing-requirement-foreign-founders-india) covers FY 2025-26, filed under the old form numbers.

## Is a loan from a foreign parent a deposit under the Companies Act?

No, as long as it complies with FEMA. Rule 2(1)(c)(ii) of the Companies (Acceptance of Deposits) Rules, 2014 excludes money from foreign bodies corporate and other non residents. The exclusion is subject to FEMA. The company still reports the 31 March balance in Form DPT-3, due on 30 June.

We read the exclusion as covering only a compliant ECB, so fix a missing LRN first. Our [DPT-3 guide for foreign owned companies](/insights/dpt-3-return-of-deposits-foreign-owned-company) covers the return. RBI's FLA FAQs count loans from a direct investor as "other capital" in the FLA return, filed on FLAIR by 15 July.

## Should the parent lend, subscribe to CCDs or invest equity?

It depends on whether the parent wants the money back. An ECB suits funding the subsidiary will repay from cash flow. Equity suits funding for losses or long term assets. Compulsorily convertible debentures (CCDs) sit between them, and FEMA treats them as equity instruments.

| Feature | ECB from the parent | CCDs issued to the parent | Equity shares issued to the parent |
|---|---|---|---|
| FEMA category | Borrowing under Schedule I | Equity instrument under the NDI Rules | Equity instrument under the NDI Rules |
| RBI filing | Form ECB 1, then Form ECB 2 | FC-GPR within 30 days of issue | FC-GPR within 30 days of issue |
| Minimum term | Average maturity of 3 years | Converts into equity; no repayment | No repayment |
| How money returns to the parent | Interest and principal | Coupon until conversion, then as equity | Dividends, buyback or capital reduction |
| Pricing | Market rate, arm's length | Conversion price under the NDI Rules | Not below fair value under rule 21 |
| DPT-3 treatment | Exempt under rule 2(1)(c)(ii) | Exempt under rule 2(1)(c)(ix) | Not reported |
| End use limits | Regulation 3A | Sector rules for FDI | Sector rules for FDI |

A parent can also fund the subsidiary through a [rights issue](/insights/rights-issue-indian-subsidiary-foreign-parent).

## What changed in 2026

RBI moved the ECB rules into the regulations and loosened most limits. Paragraph references are to Schedule I; circulars are A.P. (DIR Series) circulars.

| Item | Old rule | New rule | Date | Instrument |
|---|---|---|---|---|
| Where the rules sit | Part I of the ECB Master Direction of 26 Mar 2019 | Regulation 3A and Schedule I to the 2018 Regulations | 16 Feb 2026 | FEMA 3(R)(5)/2026-RB; Circular No. 22 |
| Recognised lenders | Residents of FATF or IOSCO compliant countries; individuals only if foreign equity holders | Any person resident outside India, plus two institution types | 16 Feb 2026 | Paragraph 2 |
| Eligible borrowers | Entities eligible to receive FDI, plus named others | Any resident person other than an individual, set up under a Central or State Act | 16 Feb 2026 | Paragraph 1 |
| Borrowing limit | USD 750 million per financial year | Higher of USD 1 billion outstanding or 300% of net worth | 16 Feb 2026 | Paragraph 5 |
| Debt to equity test on a parent loan | 7:1 above USD 5 million | No separate ratio | 16 Feb 2026 | Paragraph 5 |
| MAMP for a parent loan used as working capital | 5 years | 3 years | 16 Feb 2026 | Paragraph 6 |
| Short ECB for manufacturers | 1 year, up to USD 50 million a year | One to three years, up to USD 150 million outstanding | 16 Feb 2026 | Paragraph 6 |
| Cost | Benchmark plus 500 bps (foreign currency) or 450 bps (rupee) | Market conditions and arm's length; trade credit ceiling below 3 years | 16 Feb 2026 | Paragraphs 7 and 9 |
| End use | Negative list; working capital and rupee loan repayment needed longer maturities | Nine barred uses | 16 Feb 2026 | Regulation 3A |
| LRN form | Form ECB | Form ECB 1, new format from 18 Feb 2026 | 16 Feb 2026 | Paragraph 16; Circular No. 23 |
| Form ECB 2 timing | Monthly, within 7 working days | Within 7 calendar days after a month with a drawdown or debt servicing | 16 Feb 2026 | Paragraph 16 |
| LSF on Form ECB 1 returns | Formula for flow returns | INR 7,500 flat | 1 Apr 2026 | Circular No. 25 |
| LSF on several late ECB 2 returns | One fixed INR 7,500 for each LRN | INR 7,500 for each late return | 1 Apr 2026 | Circular No. 25 |
| Old ECB circulars | Five circulars of 2012 to 2015 | Withdrawn | 8 Sep 2026 | Circular No. 21 |

On the tax side, the Income Tax Act, 2025 renumbered the rules from 1 Apr 2026. Withholding moved to section 393 and non resident rates to section 207. Forms 3CEB, 27Q, 15CA and 15CB became Forms 48, 144, 145 and 146. Our summary of [what the Income Tax Act, 2025 changed](/insights/income-tax-act-2025-changes-for-foreign-owned-companies) maps the rest.

## Worked example

### A USD 1 million working capital loan from a US parent

A Delaware company owns 99.99 percent of an Indian Private Limited company. It lends USD 1,000,000 for working capital for three years, repaid at the end. Interest is 6 month SOFR plus 250 basis points, paid half yearly. We assume SOFR stays at 4.00 percent, so the rate is 6.50 percent, and INR 88.00 per USD. Both are illustrations, not market quotes.

| Test | Facts | Result |
|---|---|---|
| Borrower | Private Limited company under the Companies Act, 2013 | Eligible, paragraph 1 |
| Lender | US company, a person resident outside India | Recognised, paragraph 2 |
| Limit | USD 1 million against the USD 1 billion leg | Within the limit, paragraph 5 |
| Average maturity | One repayment at the end of year 3 | 3.00 years, meets the MAMP |
| Cost | SOFR plus 250 bps, benchmarked against independent USD loans | Market and arm's length, paragraphs 7 and 9 |
| End use | Working capital | Not barred by regulation 3A |

| Date | Event | Filing | Due |
|---|---|---|---|
| December 2026 | Board resolution and loan agreement | Form ECB 1 through the AD bank | Before drawdown |
| 15 Jan 2027 | Drawdown of USD 1,000,000 | Form ECB 2 for January 2027 | 7 Feb 2027 |
| By 28 Feb 2027 | Convert and credit the rupee account | No filing; paragraph 10 | End of the month after receipt |
| 31 Mar 2027 | Interest accrued in the books is credited to the parent | TDS on the credit | Deposit by 30 Apr 2027 |
| 30 Jun 2027 | Loan balance on 31 Mar 2027 | DPT-3 under rule 2(1)(c)(ii) | 30 Jun 2027 |
| 15 Jul 2027 | Interest of USD 32,500 paid | Forms 145 and 146; Form ECB 2 for July 2027 | Before remittance; ECB 2 by 7 Aug 2027 |
| 7 Aug 2027 | Deposit the tax on the July payment | Challan | 7 Aug 2027 |
| 31 Oct 2027 | Quarterly TDS statement | Form 144 for July to September 2027 | 31 Oct 2027 |
| 31 Oct 2027 | Transfer pricing report for tax year 2026-27 | Form 48 | One month before the 30 Nov 2027 return |
| 15 Jan 2030 | Repayment of USD 1,000,000 and last interest | Form ECB 2 for January 2030 | 7 Feb 2030 |

Each half year, interest is USD 1,000,000 × 6.50 percent ÷ 2 = USD 32,500, or INR 28,60,000. Yearly interest of INR 57,20,000 is below INR 1 crore, so no surcharge applies and section 177 does not bite.

| Withholding choice | Rate | Tax per half year (USD) | Tax per half year (INR) | Parent receives (USD) | Tax over 3 years (USD) |
|---|---|---|---|---|---|
| Treaty rate, Article 11(2)(b) | 15% | 4,875 | 4,29,000 | 27,625 | 29,250 |
| Domestic rate, section 207 plus 4% cess | 20.8% | 6,760 | 5,94,880 | 25,740 | 40,560 |

The treaty rate saves USD 11,310 over the loan. The price is an Indian return for the parent each tax year.

At USD 2 million, yearly interest is INR 1,14,40,000. Say the subsidiary's EBITDA is INR 2,00,00,000. Section 177 allows INR 60,00,000 (30 percent of EBITDA) and disallows INR 54,40,000 for that year. The domestic rate would also carry a 2 percent surcharge, taking it to 21.216 percent.

### The cost of a late ECB 2

The January 2027 Form ECB 2 is due on 7 Feb 2027. Suppose the team files it on 20 Mar 2027, 41 days late. The delay rounds up to two months, so n is 2 ÷ 12, or 0.17.

A is USD 1,000,000 × 88.00 = INR 8,80,00,000. The variable part is 0.025 percent × 8,80,00,000 × 0.17 = INR 3,740. The formula gives INR 11,240. With note (d) rounding upwards to the nearest hundred, we expect INR 11,300; RBI's email confirms the figure. A late July 2027 return would pay its own INR 7,500 plus its variable part.

## Common mistakes

1. **Drawing down before the LRN arrives.** This breaches paragraph 10, and LSF cannot fix it. Hold the wire until the AD bank confirms the LRN.
2. **Equal instalments.** A three year loan with yearly instalments averages two years. Use a single repayment or a longer tenor.
3. **Treating Form ECB 2 as an annual chore.** Each drawdown and interest payment starts a seven day clock after month end.
4. **Letting the parent set the rate.** A group treasury rate can fail FEMA's arm's length test and section 161. Benchmark it before signing.
5. **Paying at the treaty rate without papers.** Collect the TRC, Form 41, and a PAN or rule 217 details before the first interest date.
6. **Missing TDS on the year end accrual.** Section 393(11) treats a credit to interest payable as a credit to the parent.
7. **Using the loan to buy shares.** Regulation 3A bars this outside strategic corporate actions. Use equity from the parent instead.
8. **Converting to equity without a valuation.** Get a rule 21 valuation dated close to the conversion.
9. **Forgetting Revised Form ECB 1.** A new rate, tenor or repayment date needs the revised form.
10. **Leaving the parent's Indian return to chance.** A treaty rate below 20 percent means the parent files in India. Agree who prepares that return.

To have us check a draft loan agreement against Schedule I before Form ECB 1, send it through our [contact page](/contact).

## Checklist for an ECB from a foreign parent

1. Confirm that the subsidiary is an eligible borrower and the parent is resident outside India.
2. Check the end use against the nine barred uses in regulation 3A.
3. Confirm that the average maturity is at least three years.
4. Benchmark the interest rate and fees against independent loans.
5. Pass a board resolution to borrow under section 179(3)(d) of the Companies Act, 2013.
6. Sign the loan agreement, after any special resolution for a conversion option.
7. Designate one AD Category I bank and file Form ECB 1 through it.
8. Draw down only after the LRN is allotted.
9. Credit rupee proceeds to the INR account by the end of the month after receipt.
10. Collect the parent's TRC, Form 41 and PAN or rule 217 details.
11. Deduct tax on each interest credit or payment, and deposit it by the 7th of the next month.
12. File Forms 145 and 146 before each remittance.
13. File Form ECB 2 within seven calendar days after each month with a drawdown or debt servicing.
14. File Form 144 each quarter and issue Form 131 to the parent.
15. File Revised Form ECB 1 within seven calendar days after the month of any change in terms.
16. Report the 31 March balance in DPT-3 by 30 June.
17. Include the loan and interest in Form 48 and the transfer pricing file.
18. Test section 177 when interest to the parent crosses INR 1 crore in a tax year.
19. Report the final repayment or conversion in Form ECB 2, and confirm with the AD bank that the LRN is closed.

## Frequently Asked Questions

### Does a loan from a foreign parent need prior RBI approval?

No, if it meets Schedule I to the Borrowing and Lending Regulations, 2018. The subsidiary files Form ECB 1 through its designated AD Category I bank, and RBI allots a Loan Registration Number. Drawdown may follow once the LRN is allotted. We check the terms against the Schedule before the bank certifies the form.

### Can a foreign parent give an interest free loan to its Indian subsidiary?

Paragraph 4 of Schedule I covers borrowing with agreed interest, "if any", so the text contemplates a zero rate. Paragraph 9 still requires arm's length terms from a related party. For tax, section 161(4) of the Income Tax Act, 2025 blocks an adjustment that would reduce Indian income. We raise a zero rate with the AD bank before filing Form ECB 1.

### Can the subsidiary repay the parent before three years?

Only in the cases paragraph 6 of Schedule I lists. These are conversion into equity, repayment from fresh equity money, refinancing, a lender's waiver and corporate actions such as a merger. Call and put options cannot be used before the minimum average maturity ends. An ordinary early repayment from cash flow breaches the MAMP.

### What happens to parent loans taken before 16 Feb 2026?

An ECB with an LRN obtained before FEMA 3(R)(5)/2026-RB took effect keeps the terms that applied then. Its reporting follows the 2026 rules, including the calendar day timeline for Form ECB 2. The notification sets no route to move an old loan onto 2026 terms. In our reading, a refinance through a fresh ECB under paragraph 12 does that.

### Can an LLP borrow ECB from a foreign partner?

Yes. Paragraph 1 of Schedule I makes any resident person other than an individual an eligible borrower, if a Central or State Act registers it. An LLP under the Limited Liability Partnership Act, 2008 qualifies, and a foreign partner is a recognised lender. The same LRN, Form ECB 2 and end use rules apply.

### Can the ECB be in Indian rupees?

Yes. Paragraph 3 of Schedule I allows ECB in foreign currency or Indian rupees, and the parent then bears the currency risk. The benchmark is the matching Government of India security yield. Interest on a rupee ECB falls outside the 20 percent rate in section 207. It takes 35 percent plus surcharge and cess, so check the treaty rate first.

### Can a subsidiary with accumulated losses borrow from its parent?

Yes. Paragraph 5 of Schedule I uses the higher of USD 1 billion of outstanding ECB or total borrowing of 300 percent of net worth. A loss making subsidiary with low or negative net worth can still use the USD 1 billion leg. Only a borrower under restructuring or insolvency needs the plan's permission.

### Can we change the interest rate or extend the tenor after drawdown?

Yes, with the lender's consent, under paragraph 14 of Schedule I. The revised terms must still meet the MAMP and the arm's length rule. If RBI regulated lenders also fund the borrower, their restructuring rules apply to a tenor extension. File Revised Form ECB 1 within seven calendar days from the end of the month of the change.

### What if the subsidiary cannot repay the ECB at maturity?

It has three routes under Schedule I. It can extend the tenor with the parent's consent under paragraph 14 and file Revised Form ECB 1. It can refinance with a fresh ECB under paragraph 12, if that keeps the MAMP. It can convert the matured but unpaid ECB into equity under paragraph 13, with FC-GPR within 30 days.

### Can ECB money be used to buy shares in another Indian company?

Generally no. Regulation 3A(1)(g) bars transactions in listed or unlisted securities. The exception covers corporate actions such as a merger, demerger, amalgamation or acquisition of control, and only for strategic purposes aimed at long term value. Parking surplus ECB money in mutual funds or listed shares is not allowed.

### Can the parent's ECB repay an Indian bank loan?

Yes, in most cases. Regulation 3A(1)(h) bars repaying a domestic rupee loan only if the loan funded a barred use or is a non performing asset. Repaying a clean working capital line is allowed. Under the 2019 framework, a parent lender needed a five year average maturity for this.

### Is a parent from a country sharing a land border with India allowed to lend?

Schedule I sets no land border condition on lenders; it accepts any person resident outside India. In our reading, the loan needs no Government approval. Converting it into shares is different, because equity from a land border investor or beneficial owner can need Government approval under the NDI Rules.

### Does a small parent loan still need Form 48?

Yes. Section 172 of the Income Tax Act, 2025 requires Form 48 for every international transaction with an associated enterprise, whatever the amount. The loan and the interest both go in. Rule 84 relaxes the documentation file where international transactions total INR 1 crore or less, but the rate must still be at arm's length.

### Does the parent need an Indian PAN?

Not for the subsidiary to deduct tax at the treaty rate. Rule 217 of the Income Tax Rules, 2026 accepts the parent's name, email, phone, address, TRC and tax identification number instead. Section 397(2)(c) allows this. The parent needs a PAN if it must file an Indian return, which happens when tax is withheld below the section 207 rate.

### Does the subsidiary need a lower TDS certificate for the treaty rate?

No. The subsidiary can apply the treaty rate directly under section 159, with the TRC, Form 41 and a chartered accountant's Form 146. A lower deduction certificate in Form 128 under section 395(1) helps when the parent wants a rate below the treaty. Our note on [lower TDS certificates for non residents](/insights/lower-tds-certificate-non-residents-form-128) covers Form 128.

### Can ECB proceeds be kept abroad until needed?

Proceeds meant for permitted foreign currency spending may stay in a foreign currency account abroad. Pending use, paragraph 10 allows an unencumbered fixed deposit or debt instrument abroad of up to one year. Rupee proceeds must reach an INR account with the designated AD bank by the end of the month after receipt.

### Does the hedging rule of the 2019 framework still apply?

The 2019 Master Direction asked ECB borrowers to follow their sectoral regulator's hedging guidelines. The 2026 Schedule I, as we read it, sets no hedging requirement for a parent loan to an unregulated company. A dollar loan still leaves the subsidiary with currency risk, so we model that before choosing the currency.

### What is an untraceable ECB borrower?

Paragraph 16 of Schedule I defines one: a borrower with an active LRN that has not filed returns for four consecutive quarters or more. The AD bank must also have failed, despite documented attempts, to reach the borrower or its auditors, directors and promoters. The bank then reports it to RBI and the Directorate of Enforcement.

## Sources

- Reserve Bank of India, Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, Notification No. FEMA 3(R)(5)/2026-RB, 9 Feb 2026, published in the Gazette on 16 Feb 2026, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13306&Mode=0
- Reserve Bank of India, Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, RBI/2025-26/221, A.P. (DIR Series) Circular No. 22, 16 Feb 2026, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13305&Mode=0
- Reserve Bank of India, Reporting under FEMA, Returns pertaining to External Commercial Borrowing, RBI/2025-26/223, A.P. (DIR Series) Circular No. 23, 18 Feb 2026, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13308&Mode=0
- Reserve Bank of India, Reporting under FEMA, Returns pertaining to External Commercial Borrowing (late submission fee), RBI/2025-26/253, A.P. (DIR Series) Circular No. 25, 30 Mar 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=13345&Mode=0
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- Reserve Bank of India, Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations, FED Master Direction No. 5/2018-19, 26 Mar 2019, updated as on 8 Sep 2026 (Part II, paragraph 14, trade credit cost ceiling), https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
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- Income Tax Department, First Schedule to the Finance Act, 2026 (Part II, rates for deduction of tax at source), read 27 Sep 2026, https://www.incometaxindia.gov.in/w/first-schedule-104
- Income Tax Department, guidance notes on Forms 41, 48, 145 and 146, read 27 Sep 2026, https://www.incometaxindia.gov.in/documents/d/guest/fn-41, https://www.incometaxindia.gov.in/documents/d/guest/fn-48, https://www.incometaxindia.gov.in/documents/d/guest/fn-145, https://www.incometaxindia.gov.in/documents/d/guest/fn-146
- Income Tax Department, FAQs on Form 49 (safe harbour, rule 88), read 27 Sep 2026, https://www.incometaxindia.gov.in/documents/d/guest/form-49-faqs
- Income Tax Department, Income Tax Bill 2025 navigator (old to new section map), https://www.incometaxindia.gov.in/documents/20117/43138/new-income-tax-bill-2025-navigator.pdf/8df3eecc-8a0d-e28d-85c7-4db6310a52dd
- Income Tax Department, treaty texts with the United States, United Kingdom, Singapore, UAE, Canada, Germany, Japan, Netherlands, France and Mauritius, read 27 Sep 2026, https://www.incometaxindia.gov.in/w/usa-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/uk-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/singapore-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/uae-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/canada-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/germany-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/japan-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/netherlands-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/france-comprehensive-agreements-1, https://www.incometaxindia.gov.in/w/mauritius-comprehensive-agreements-1

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