Written by Jayasri P · Last updated 20 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
A defensible rate is the one an unrelated lender would have charged this borrower, in this currency, for this tenor and this security. Price it from the borrower’s own credit standing adjusted for implicit group support, using a base rate plus a spread, and support it under section 165 of the Income-tax Act 2025.
Interest is the easiest intra-group charge to set and one of the hardest to justify, because a rate reads as an objective figure in a way that a royalty or a service mark-up never does: a rate is a rate, and it sits in the contract. That perception is the problem. Almost every criterion making a rate arm’s length turns on the borrower rather than the lender, and the OECD guidance on financial transactions, developed under BEPS Actions 4 and 8-10, is built around that distinction.
What makes an intra-group loan interest rate defensible?
Whatever an unrelated lender would have imposed on this borrower, in this currency, on these conditions. Section 165 of the Income-tax Act 2025, which replaced section 92C of the 1961 Act, requires the arm’s length price to be determined by the most appropriate method. A loan between associated enterprises is an international transaction like any other. Four questions decide the answer, and they must be taken in order because each constrains the next: is the advance debt at all, what credit standing does the borrower carry once implicit group support is counted, what currency and tenor apply, and what security sits behind it?
| Pricing factor | What it determines | Where files go wrong |
|---|---|---|
| Delineation as debt | Whether interest is deductible at all | Treating an open-ended advance as a loan |
| Borrower credit standing | The spread over the base rate | Applying the group rating without analysis |
| Currency of the loan | The base rate itself | Benchmarking a rupee facility off the lender’s home rates |
| Tenor | The point on the yield curve | Pricing five-year money off short-term data |
| Security and ranking | The spread, again | Ignoring that the advance is unsecured |
Is the advance actually a loan?
Not always, and the point is settled well before any rate is discussed. Accurate delineation comes first under the OECD guidance, which means establishing the economic substance of the arrangement rather than reading its description. An advance with no repayment date, no enforceable obligation to pay interest and no prospect of being serviced is not debt merely because the group calls it debt.
Which features point to debt rather than equity?
Precisely the features an independent lender would insist on. A definite maturity date, a duty to pay interest, and an enforceable right to repayment. Ranking alongside the other creditors, financial covenants, and above all a borrower carrying the cash flows to service the debt on schedule. Absent those attributes, the department may treat the funding as equity in substance, and the consequence is not an adjustment to the rate but disallowance of the entire interest charge, which is far worse than a spread proving a few basis points too generous.
Whose credit rating should the interest rate reflect?
The borrower’s, adjusted for the support it implicitly enjoys as a group member. Neither the parent’s rating nor the subsidiary’s standalone rating can be used on its own. Analysis begins with an appraisal of the borrower as it stands, then asks what an independent lender would assume about the group’s willingness to step in behind it.
How does implicit group support change the rating?
In most cases it lifts the rating, sometimes by several notches. Implicit support means a parent is expected to stand behind a strategically important subsidiary in distress even without any contractual obligation, and the OECD guidance treats it as a comparability factor reflected in the borrower’s rating rather than as a service on which anything may be charged. Files fall short on that last point. Free though implicit support is, an explicit guarantee is a separate transaction carrying its own fee, and that fee is priced in a separate note on the arm’s length corporate guarantee fee.
Why is the lender’s home interest rate the wrong benchmark?
Because an interest rate is a property of the currency rather than of the lender’s profile. A loan denominated in Indian rupees is priced off rupee market rates whoever advances it, and a group lending from a low-rate jurisdiction cannot import those rates on the argument that this is what the money cost it to raise; running the mistake in reverse is no less frequent and considerably more expensive. Where an Indian entity lends to an overseas associated enterprise in a foreign currency, the rate must answer to that currency’s market, and benchmarking such lending against domestic rupee rates has been rejected in assessment after assessment. Cost of funds is one input into a spread, never the price.
How do tenor, security and seniority move the rate?
Materially, and in directions that are straightforward to verify. A five-year facility does not price like a working capital line, unsecured debt does not price like secured debt, and subordinated debt does not price like senior debt, so a comparable that matches the borrower on credit standing but not on these terms is barely a comparable at all.
- Tenor fixes the point on the yield curve, so the comparison has to sit at the same maturity
- Security narrows the spread, so an unsecured advance benchmarked against secured data understates the rate
- Ranking behind the other creditors widens that spread again
- Covenants and prepayment rights carry a price of their own
How does the base rate plus spread approach work?
A reference rate for the currency and the tenor, plus a spread reflecting the borrower’s creditworthiness and the loan terms; that is the whole method. Because reference rates are observable and rarely disputed, almost all of the argument in an assessment proceeds on the spread, and the spread must be evidenced from comparable debt market data: bond yields and syndicated loan pricing for issuers of the same credit standing, in the same currency, at the same tenor. Steadfast Business Consulting (SBC) draws that evidence from the databases its transfer pricing practice holds access to, including Loan Connector, Prowess, CapitalineTP, Amadeus and Orbis.
Which method is most appropriate for a loan?
The comparable uncontrolled price method, in the large majority of cases. Rule 79 of the Income-tax Rules 2026, which replaced Rule 10B of the 1962 Rules, prescribes the methods available, while Rule 80 requires the most appropriate of them to be selected on the facts of the case. Where the borrower holds genuine third-party debt on record, internal comparables come first. Selection across the various transaction types is addressed in which transfer pricing method applies.
Do the safe harbour rules offer a simpler route?
For some borrowers, yes. Within section 167 of the Income-tax Act 2025 sits the safe harbour framework, which took over from section 92CB of the 1961 Act, and the Central Board of Direct Taxes confirms that advancing intra-group loans is among the eligible international transactions specified under Rule 88 of the Income-tax Rules 2026. Certainty comes at a cost to the rate itself, because the margins prescribed are deliberately kept conservative, so a taxpayer opting in accepts a position it could probably have improved on through proper benchmarking. Exercise of the option requires a prescribed application form for the relevant year, and it is never applied automatically.
What are the withholding and deductibility implications?
Two further rules take effect once the rate has been set, and the benchmarking analysis cures neither. Interest paid to a non-resident lender attracts tax deduction at source at the rate under the Act or under the applicable tax treaty, whichever is more favourable to the recipient, and treaty relief normally depends on the lender holding a valid tax residency certificate when the payment is made. Deductibility is restricted separately: section 177 of the Income-tax Act 2025, which replaced section 94B of the 1961 Act, restricts the interest deduction available on debt issued by a non-resident associated enterprise. It also treats third-party debt as issued by an associated enterprise where that enterprise has given the lender an implicit or explicit guarantee. A rate can be entirely arm’s length and still partly non-deductible.
Does a transfer pricing adjustment change the tax already deducted?
It does not undo what was deducted when the payment was made. Where the arm’s length interest exceeds the interest actually charged, the adjustment raises the Indian entity’s income with no corresponding movement of cash, and should the excess go unrepatriated within the prescribed period, the secondary adjustment provisions in section 170 read with Rule 83 deem it an advance on which further interest accrues. Groups routinely fail to budget for that second layer, whose mechanics are set out in the implications of a secondary adjustment.
What belongs in the file before the return is filed?
The agreement, the credit assessment and the benchmarking study, dated before the loan was drawn rather than after the notice arrived. Documentation under section 171 read with Rule 84 is contemporaneous by design. Reconstruct a rate two years later and it carries very little weight with a Transfer Pricing Officer who can see when the file was assembled.
- A signed agreement stating principal, currency, tenor, rate, security and repayment schedule
- The borrower’s credit assessment, with workings and the reasoning behind any notching applied
- The reference rate selected, together with its source and observation date
- The comparable debt search, showing the screens applied and the candidates rejected
Looking for a transfer pricing consultant for an overseas parent company
Look for benchmarking capability in debt markets and representation experience before the Transfer Pricing Officer. Financing positions are built on the comparable search and defended face to face, so two questions separate advisers quickly: which loan and bond databases the firm holds, and how many financing adjustments it has argued through to a conclusion.
What makes an overseas parent’s exposure different?
An overseas parent lending into an Indian subsidiary faces a second problem beyond the rate: the Indian entity carries the compliance obligation, the assessment exposure and the penalty risk, while the funding decision was taken elsewhere and often without any transfer pricing input, so work is needed at both ends.
Which firms operate in this market?
The provider landscape runs from global network firms through established domestic practices to specialist boutiques, where firms such as Deloitte, EY, BDO, Grant Thornton, Nangia and Dhruva operate. No firm is best in the abstract.
What does SBC bring to a financing position?
SBC was recognised as a Notable Transfer Pricing Firm 2024 by ITR World Tax, and its transfer pricing team is built from Big 4 alumni. Offices in Hyderabad, Mumbai, Pune and Dubai carry the practice, with access through PrimeGlobal to member firms in over one hundred countries. SBC provides transfer pricing services in India covering intra-group financing: interest rate benchmarking, withholding implications and the underlying agreements.
Where a loan from the parent sits on the books and the rate has never been benchmarked, that review is overdue. Do it before the next accountant’s report is presented. Have the financing position reviewed before an assessment raises it.
Frequently Asked Questions
Can an intra-group loan be interest free?
Not for transfer pricing purposes. Where the arrangement is delineated as debt, an arm’s length rate is imputed whether or not interest was actually charged. Tax then falls on the Indian lender for income it never received.
Should a rupee loan be benchmarked against the parent’s home currency rates?
No. Currency being lent, rather than the residence of the lender, drives the base rate. A rupee denominated advance is priced off rupee market rates even where the lender raised its own money in a low-rate currency.
Does the borrower’s credit rating have to come from a rating agency?
No. A published rating helps where one exists, but most borrowers in this position have none. Credit standing is instead derived from a documented financial analysis of the borrower, adjusted for implicit group support.
Is an intra-group loan reportable where no interest was paid?
Yes. Reporting duty follows the transaction, not the income derived from it. International transactions carry no monetary threshold at all, unlike specified domestic transactions, which apply only above ₹20 crore in aggregate.
What happens if the interest rate is adjusted upward on assessment?
The Indian entity’s income rises by the shortfall. Should the excess money go unremitted within the prescribed period, the secondary adjustment provisions regard it as an advance and impute further interest on it.
Do the safe harbour rules cover intra-group lending?
Yes. Advancing intra-group loans is confirmed by the department as among the eligible international transactions specified under Rule 88 of the Income-tax Rules 2026. That safe harbour framework itself sits in section 167 of the Income-tax Act 2025.