Intercompany Loan Agreement Template: India Parent-Subsidiary

Why a Proper Intercompany Loan Agreement Matters in India

When a foreign parent company lends money to its Indian subsidiary, the transaction triggers compliance requirements under at least four distinct regulatory frameworks: the Foreign Exchange Management Act (FEMA), the Companies Act 2013, the Income Tax Act (including transfer pricing rules), and RBI directions on External Commercial Borrowings (ECB). A poorly drafted intercompany loan agreement can result in penalties up to three times the loan amount under FEMA, transfer pricing adjustments adding 2% penalty on the transaction value, and rejection of the entire loan structure by the RBI.

This template guide walks you through every clause your intercompany loan agreement needs, with specific references to Indian regulatory requirements as of 2026. Whether you are a US, UK, or Singapore parent company funding your wholly owned subsidiary in India, or an Indian company lending downstream to a foreign entity it controls, this article provides the practical framework your legal team needs.

Regulatory Framework: Four Laws Governing Intercompany Loans

FEMA and RBI ECB Regulations

When a foreign parent lends to an Indian subsidiary, the transaction is classified as an External Commercial Borrowing under FEMA. The Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, which came into effect in February 2026, consolidates and restructures ECB provisions. Key requirements include:

• Eligible lenders: Foreign equity holders holding 25% or more direct equity, or 51% or more indirect equity, or group companies with a common overseas parent qualify as recognized lenders
• Borrowing limits: Up to USD 1 billion, or an amount that would not cause total domestic and external borrowings to exceed 300% of the borrower's net worth (whichever is higher)
• All-in cost ceiling: Removed for ECB with average maturity of 3 years or more (cost must be in line with prevailing market conditions); ECB with average maturity under 3 years must still meet the Trade Credit ceiling of the applicable benchmark rate plus 300 basis points (foreign currency) or plus 250 basis points (rupee-denominated)
• Minimum average maturity: 3 years for most ECBs (the earlier 5-year requirement for loans from foreign equity holders has been removed); manufacturing-sector borrowers may raise ECB with 1-3 year maturity, capped at USD 150 million outstanding
• End-use restrictions: ECB proceeds cannot be used for real estate activities, investing in capital markets, or on-lending to entities not within the group (with exceptions for RBI-regulated entities)

Companies Act 2013: Section 186

Section 186 of the Companies Act governs inter-corporate loans and investments. When an Indian subsidiary lends to its parent or sister companies, key thresholds apply:

• Aggregate limit: 60% of paid-up share capital + securities premium + free reserves, or 100% of free reserves and securities premium, whichever is higher
• Board approval: Required in all cases. Section 186(5) requires the resolution sanctioning the loan to be passed at a meeting of the Board with the consent of all the directors present at the meeting, so it cannot be passed by circulation
• Special resolution: Required when aggregate loans exceed the Section 186(2) limit. However, no special resolution is needed for loans to a wholly owned subsidiary or joint venture
• Minimum interest rate: Section 186(7) — the rate must not be lower than the prevailing yield of the one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan
• Public financial institution consent: Required if the company has existing institutional borrowings and the proposed loan exceeds Section 186(2) limits

Transfer Pricing: Sections 161-173

Every intercompany loan between associated enterprises triggers transfer pricing documentation requirements under sections 161 to 173 of the Income-tax Act, 2025 (sections 92 to 92F of the Income-tax Act, 1961). The interest rate must be at arm's length, typically benchmarked using the Comparable Uncontrolled Price (CUP) method. Key considerations include:

• Benchmarking: Compare the intercompany rate against market rates for loans of similar currency, tenure, credit profile, and security
• Annual refresh: A fresh benchmarking analysis must be conducted every financial year
• Documentation threshold: Mandatory TP documentation is required when aggregate international transactions exceed INR 1 crore (INR 20 crore for domestic transactions)
• Form 48 (formerly Form 3CEB): The transfer pricing audit report must be filed by October 31 of the assessment year, certified by a Chartered Accountant
• Consequences of non-compliance: failure to furnish Form 48 attracts a fee under section 428(d) of the Income-tax Act, 2025 (section 271BA of the Income-tax Act, 1961) — INR 50,000 where the delay is up to one month and INR 1,00,000 thereafter; separately, 2% of the transaction value under section 442 of the Income-tax Act, 2025 (section 271AA of the Income-tax Act, 1961) for documentation failures

Withholding Tax on Interest: Section 393(2)

Interest payments from an Indian subsidiary to a foreign parent attract withholding tax (TDS) under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), at the rates in force. Where the borrowing is denominated in foreign currency, that rate is 20% under section 207(1) (Table, Sl. Nos. 1-3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), plus surcharge and cess. The 20% rate is scoped to foreign-currency debt: interest on a rupee-denominated loan falls outside it and is taxed at the rates in force for the payee — 35% for a foreign company — plus surcharge and cess. Either rate may be reduced under a Double Taxation Avoidance Agreement (DTAA). Article 11(2) of the India-US DTAA and Article 11(2) of the India-Singapore DTAA each cap interest at 15% in the general case; the 10% tier in both treaties is lender-based and applies only where the loan is granted by a bank carrying on bona fide banking business or a similar financial institution, which a corporate parent will not normally satisfy. The payer must file Form 145 (formerly Form 15CA) before remitting the interest, with a Form 146 (formerly Form 15CB) certificate only for Part C — a taxable remittance above INR 5 lakh in the financial year that is not covered by an Assessing Officer's certificate.

Essential Clauses: What Your Agreement Must Include

Clause 1: Parties and Recitals

Identify the lender (foreign parent) and borrower (Indian subsidiary) with full legal names, CIN/registration numbers, registered addresses, and the relationship between them. The recitals should reference the board resolution authorizing the loan and any shareholder approval obtained under Section 186.

Clause 2: Loan Amount and Currency

Specify the principal amount in both the lending currency and INR equivalent at the reference exchange rate. For ECB compliance, confirm the amount falls within the USD 1 billion or 300% net worth ceiling. Include drawdown mechanics if the loan is disbursed in tranches.

Clause 3: Purpose and End-Use

Under ECB regulations, the end-use must be explicitly stated and must fall within permitted categories. Acceptable uses include capital expenditure, working capital (for eligible borrowers), refinancing of existing ECBs, and on-lending to group entities. Prohibited uses include real estate speculation, capital market investments, and equity investment.

Clause 4: Interest Rate and Benchmark

The interest rate must satisfy three tests simultaneously:

1. ECB all-in cost ceiling: Removed for ECB with average maturity of 3 years or more; ECB under 3 years must meet the Trade Credit ceiling (benchmark rate plus 300 bps for foreign currency, plus 250 bps for rupee-denominated)
2. Transfer pricing arm's length: Rate must be comparable to what independent parties would agree in similar circumstances
3. Section 186 minimum: If the Indian entity is the lender, the rate must not be lower than the yield of the Government Security closest to the loan's tenor (section 186(7))

Document the benchmarking analysis as an annexure to the agreement. This analysis should reference comparable third-party loans sourced from databases such as Bloomberg or Thomson Reuters LPC.

Clause 5: Tenor and Repayment Schedule

For ECB-classified loans, minimum average maturity is 3 years for most borrowers (the earlier 5-year requirement for loans from foreign equity holders has been removed). Include a clear amortization schedule specifying principal repayment dates, any bullet payment provisions, and prepayment conditions.

Clause 6: Security and Guarantees

If the loan is secured, describe the collateral in detail. Note that creating a charge on assets of an Indian company in favor of a foreign lender requires RBI approval under FEMA. Corporate guarantees from group companies also have transfer pricing implications and must be benchmarked separately.

Clause 7: Events of Default

Standard default triggers should include: failure to pay principal or interest within a grace period, breach of financial covenants, insolvency proceedings under the Insolvency and Bankruptcy Code 2016, material adverse change, and cross-default provisions linked to other group borrowings.

Clause 8: Representations and Warranties

The borrower should represent that: the loan has been duly authorized by the Board (and shareholders if required), it complies with Section 186 limits, the end-use is permitted under ECB regulations, and all necessary RBI approvals have been obtained. The lender should represent that it qualifies as a recognized lender under the revised ECB framework.

Clause 9: Tax Gross-Up and Indemnity

Address withholding tax obligations under Section 195. Specify whether interest payments are gross or net of TDS. If gross, include a tax gross-up clause requiring the borrower to pay additional amounts so the lender receives the agreed interest. Reference the applicable DTAA rate and require the lender to provide, for each tax year, a Tax Residency Certificate (TRC) issued by its own home tax authority together with Form 41 (formerly Form 10F). Treaty relief at source is available only where that declaration has actually been filed.

Clause 10: Reporting and Compliance Covenants

Include covenants requiring the borrower to:

• File the ECB registration (Form ECB) with RBI through the authorized dealer (AD Category-I) bank, not the FIRMS portal (FIRMS hosts equity forms only)
• File Form ECB-2 through the authorized dealer (AD Category-I) bank to RBI, within 7 calendar days from the end of the month in which the proceeds were received or debt servicing was undertaken
• File the annual FLA return on the FLAIR portal by July 15 each year
• Maintain transfer pricing documentation contemporaneously
• File Form 48 by October 31 of the assessment year
• File Form 145 before each interest remittance, with a Form 146 certificate where Part C applies

Transfer Pricing Benchmarking: Getting the Interest Rate Right

The single most scrutinized element of an intercompany loan is the interest rate. Indian tax authorities routinely challenge intercompany lending rates during transfer pricing audits. Here is a step-by-step approach to defensible benchmarking:

Step 1: Credit Rating Analysis

Determine the borrower's standalone credit profile. If the Indian subsidiary does not have a formal credit rating, conduct a shadow rating using financial ratios (leverage, interest coverage, profitability) compared against rated Indian companies in the same sector. The credit rating directly affects the interest spread.

Step 2: Select Comparable Instruments

Using the CUP method, identify third-party loans with matching characteristics: same currency (e.g., USD), similar tenor (e.g., 5 years), comparable credit quality, similar security structure, and issued within a 12-month window of the intercompany loan date.

Step 3: Adjust for Differences

Apply adjustments for any differences between the comparable loans and the intercompany transaction. Common adjustments include credit risk differentials, currency premium (if comparing cross-currency), liquidity premium for private vs. public debt, and implicit support from the parent company.

Step 4: Document and Archive

Prepare a contemporaneous transfer pricing study documenting the entire analysis. This document must be ready before the Form 48 filing deadline. Archive all supporting data, including comparable loan details, credit analysis, and adjustment calculations.

RBI Filing Requirements and Timelines

Intercompany loans classified as ECBs require multiple filings with the RBI through the authorized dealer (AD) bank:

Entities filing the FLA return for the first time must register on the FLAIR portal with fresh credentials; existing filers use their current login. The date to work to is July 15 — do not plan around an extension unless the RBI has announced one for that particular year.

Common Mistakes That Trigger Regulatory Action

Based on our experience with FEMA and RBI compliance work, these are the most frequent errors in intercompany loan agreements:

• Interest rate set without benchmarking: Using the parent company's cost of funds as the intercompany rate (instead of the subsidiary's standalone borrowing cost) is the single most common transfer pricing mistake. Tax authorities will re-characterize the rate based on the borrower's credit profile.
• Missing ECB registration: Drawing down before Form ECB has gone through the AD Category-I bank to the RBI and a Loan Registration Number (LRN) has been allotted. ECB is reported through the AD bank, never on the FIRMS portal, which hosts equity forms. Disbursing without an LRN turns a compliant loan into an unauthorised FEMA transaction.
• End-use violations: Using ECB proceeds for purposes not listed in the loan agreement. The RBI audits end-use certificates annually.
• Ignoring the all-in cost ceiling: Forgetting to include commitment fees, guarantee fees, and other charges when calculating the all-in cost against the ECB ceiling.
• No board resolution: Proceeding without a proper board resolution or without shareholder approval when aggregate loans exceed Section 186(2) limits.
• Thin capitalization issues: India's thin capitalization rules under Section 177 of the Income-tax Act, 2025 (section 94B of the Income-tax Act, 1961) cap interest deductions on loans from associated enterprises at 30% of EBITDA. Loans structured without considering this cap result in permanent tax disallowances.

Template Annexures and Supporting Documents

A complete intercompany loan agreement package should include:

• Annexure A: Board resolution of the borrower approving the loan
• Annexure B: Board resolution of the lender approving the loan
• Annexure C: Shareholder resolution (if Section 186 limit exceeded)
• Annexure D: Transfer pricing benchmarking study
• Annexure E: Amortization schedule
• Annexure F: End-use certificate template
• Annexure G: Details of security/collateral (if applicable)
• Annexure H: Tax Residency Certificate of the lender (for DTAA benefit)

For hands-on assistance with structuring your intercompany loan or drafting a compliant agreement, explore our FDI advisory services or FEMA-RBI compliance support.

Key Takeaways

• Every intercompany loan between a foreign parent and Indian subsidiary must comply with FEMA/ECB rules, Companies Act Section 186, transfer pricing requirements, and TDS obligations simultaneously
• The interest rate must pass three tests: ECB all-in cost ceiling, transfer pricing arm's length standard, and Section 186 minimum yield requirement
• Form ECB must go through the AD Category-I bank to the RBI and the Loan Registration Number must be allotted before any drawdown — never on the FIRMS portal
• Recurring filings include the FLA return (July 15), Form 48 (October 31), and Form ECB-2, due within seven calendar days from the end of the month in which proceeds were received or debt servicing was undertaken
• India's thin capitalization rules under Section 177 cap interest deductions at 30% of EBITDA for loans from associated enterprises