Safe Harbour Rules

What Are Safe Harbour Rules?

Safe harbour rules give a captive IT/ITeS service provider in India a pre-approved cost-plus margin for pricing services to its foreign parent, so the Transfer Pricing Officer cannot adjust a compliant price. For tax year 2026-27 onwards, that margin is at least 15.5% of operating expense, provided aggregate operating revenue from the transaction does not exceed INR 2,000 crore.

In plain terms: instead of fighting over whether your intercompany pricing is "arm's length," you can opt into a pre-approved profit margin. If you meet the threshold, the Transfer Pricing Officer (TPO) cannot make an adjustment.

Legal Framework

Safe Harbour Rules are established under:

• Section 167 of the Income-tax Act, 2025 (section 92CB of the Income-tax Act, 1961) — Empowers the Central Board of Direct Taxes (CBDT) to prescribe safe harbour rules for specified international transactions and domestic transactions
• Rules 86 to 93 of the Income-tax Rules, 2026 — The current framework for international transactions. The 2026 Rules came into force on 1 April 2026 and apply from tax year 2026-27. Rule 86 carries the definitions, rule 87 defines the eligible assessee, rule 88 lists the eligible international transactions, rule 89 prescribes the margins, rule 90 sets the procedure for transactions other than information technology services, rule 91 sets the separate procedure for information technology services, rule 92 lists the cases where safe harbour does not apply, and rule 93 bars the mutual agreement procedure once safe harbour is accepted. Rules 94 to 98 cover specified domestic transactions
• Rules 10TA to 10TG of the Income-tax Rules, 1962 — The predecessor framework, replaced by rules 86 to 93. These remain the law for tax years beginning before 1 April 2026 — that is, for FY 2025-26 (Rule 10TD as amended by Notification 21/2025) and earlier years, preserved by section 536(2)(c) of the Income-tax Act, 2025

Which Transactions Are Covered?

For tax year 2026-27 onwards, rule 89(2) of the Income-tax Rules, 2026 lists nine eligible international transactions and the circumstance each must satisfy:

The reference rates for foreign-currency loans are defined in rule 89(3)(a): 6-month Term SOFR + 45 bps (USD), 6-month EURIBOR (EUR), 6-month Term SONIA + 30 bps (GBP), 6-month TORF + 10 bps (JPY), 6-month BBSW (AUD) and 6-month compounded SORA + 45 bps (SGD).

The corporate guarantee size test now sits in the eligibility rule rather than in the rate row: under rule 88(c) the amount guaranteed must either not exceed INR 100 crore, or, where it does, the associated enterprise must carry a credit rating of adequate to highest safety from an agency registered with the Securities and Exchange Board of India.

Under rule 89(4), this rate table applies for a block period of three tax years commencing from tax year 2026-27 — that is, TY 2026-27, 2027-28 and 2028-29 — and continues to apply for subsequent block periods unless the CBDT modifies it.

The Position for FY 2025-26 and Earlier

For FY 2025-26 and earlier tax years (Rule 10TD of the Income-tax Rules, 1962, as amended by Notification 21/2025), the margins were spread across more categories: software development services and IT-enabled services at not less than 17% where the transaction value did not exceed INR 100 crore, and 18% where it exceeded INR 100 crore but not INR 300 crore; knowledge process outsourcing (value up to INR 300 crore) at 24%, 21% or 18% depending on whether employee cost was at least 60%, at least 40% but under 60%, or not more than 40% of operating expense; contract R&D relating to software development at 24% and contract R&D relating to generic pharmaceutical drugs at 24%, both up to INR 300 crore; core auto components at 12%; non-core auto components at 8.5%; corporate guarantee at 1%; and low value-adding intra-group services capped at INR 10 crore including a mark-up of not more than 5%. None of the software, ITeS, KPO or software contract-R&D figures survive into tax year 2026-27 — they are replaced by the single 15.5% row above.

How to Opt Into Safe Harbour

Opting into safe harbour is voluntary. The process:

1. Assess eligibility: Confirm that your transaction falls within a covered category and the aggregate value is within the prescribed thresholds.
2. Maintain the required margin: Ensure your Indian entity's operating profit on the relevant transactions meets or exceeds the prescribed percentage of operating costs.
3. File Form No. 49: Form No. 49 is the safe harbour option form under the Income-tax Rules, 2026, replacing Form 3CEFA. For the provision of information technology services, rule 91(3) requires it to be filed with the Director General of Income-tax (Systems) for the first of the five years covered by the election. For every other eligible transaction, rule 90 requires it to be filed with the Assessing Officer. In both cases the deadline is the return due date under section 263(1)(c) for the relevant tax year. The form must be certified by the chief executive officer, or the chairman and managing director, and verified by the person authorised to verify the return under section 265.
4. Maintain documentation: You must still maintain transfer pricing documentation (master file, local file, CbCR if applicable). Safe harbour does not exempt you from documentation — it protects you from adjustments.
5. Validity: For the provision of information technology services, a validly exercised option remains in force for five consecutive tax years (rule 91(1)), and the INR 2,000 crore threshold is tested only for the first of those five years (rule 91(2)). The assessee is intimated of acceptance or rejection within two months from the end of the month in which the option is exercised, and no option may be rejected without an opportunity to remove defects and without reasons being given. Withdrawal is allowed by declaration, but not after six months from the end of the first tax year; it ends the option for that year and all later years, and bars a fresh option until the five consecutive tax years have run. For each of the four following years, a statement of eligible transactions, their quantum and their profit margins is due by the return due date. All other eligible transactions stay on a year-by-year election under rule 90.

Interaction with Transfer Pricing Assessments

When a taxpayer opts into safe harbour and meets the prescribed margin:

• The TPO cannot make a transfer pricing adjustment on the covered transactions
• The Assessing Officer cannot invoke Section 165 of the Income-tax Act, 2025 (section 92C of the Income-tax Act, 1961) to substitute a different arm's length price
• The taxpayer cannot be referred for a transfer pricing audit on the covered transactions (though other transactions remain subject to normal TP scrutiny)

However, safe harbour protection is not absolute:

• If the taxpayer has misrepresented facts or provided inaccurate information in Form No. 49, the safe harbour election is void ab initio
• Safe harbour does not protect against scrutiny under GAAR (General Anti-Avoidance Rules) if the arrangement is found to be an impermissible avoidance arrangement
• The corresponding adjustment in the foreign jurisdiction is not guaranteed — the other country's tax authority may not accept the safe harbour margin as arm's length

How This Affects Foreign Investors in India

Safe harbour rules are directly relevant to foreign investors in several scenarios:

IT/ITeS Captive Centres

The most common use case: a US or European company sets up a captive software development centre or BPO operation in India as a wholly owned subsidiary. The Indian entity provides services to the parent company and charges a cost-plus margin. For tax year 2026-27 onwards, maintaining an operating profit margin of at least 15.5% on operating expense — with aggregate operating revenue from the transaction not exceeding INR 2,000 crore — lets the Indian entity opt into safe harbour and avoid the risk of the TPO benchmarking the transaction at a different margin. The same single row covers software development, ITeS, KPO and software-related contract R&D, so the old exercise of arguing which bucket a captive falls into has largely disappeared.

Without safe harbour, TPOs frequently dispute cost-plus margins of 12-15% and push for 20-25%, leading to prolonged litigation. Safe harbour eliminates this uncertainty.

Intra-Group Loans

Foreign investors often fund their Indian subsidiaries through intercompany loans (structured as ECBs or internal commercial borrowings). Safe harbour prescribes interest rate benchmarks (SOFR/EURIBOR + spread) that, if met, will not be challenged by the TPO. This is particularly valuable because interest rate benchmarking is one of the most litigated transfer pricing issues in India.

Corporate Guarantees

If a foreign parent guarantees the debt of its Indian subsidiary, rule 89(2) prescribes a guarantee commission of not less than 1% per annum on the amount guaranteed. Eligibility depends on rule 88(c): the guarantee must not exceed INR 100 crore, or, if it does, the associated enterprise must hold a credit rating of adequate to highest safety from a SEBI-registered agency. This avoids the common dispute where the TPO imputes a higher guarantee fee.

Safe Harbour vs. Advance Pricing Agreement

Both safe harbour and Advance Pricing Agreements (APAs) provide certainty on transfer pricing, but they differ significantly:

Many foreign investors use safe harbour for routine service transactions and APAs for complex or high-value arrangements.

Common Mistakes

• Assuming safe harbour eliminates all transfer pricing risk. It only covers the specific transactions listed in rule 89(2) of the Income-tax Rules, 2026. If your Indian subsidiary has other related-party transactions (royalty payments, management fees, IP transfers), those remain subject to full TP scrutiny.
• Not filing Form No. 49 on time. The option must be exercised by the return due date under section 263(1)(c) — with the DGIT (Systems) for information technology services, with the Assessing Officer otherwise. A late election is invalid, and you lose safe harbour protection for that year. Filing the old Form 3CEFA is no longer an option; it belonged to Rule 10TE of the 1962 Rules.
• Ignoring the foreign tax impact. If you report a 15.5% margin in India, the foreign parent's deductible cost increases. If the foreign tax authority does not accept the safe harbour margin as arm's length, you may face a corresponding adjustment abroad — potentially leading to double taxation. Check with your home country advisor.
• Aggregating covered and non-covered transactions. Safe harbour margins must be calculated only on the eligible transactions. Mixing covered IT services with non-covered activities (e.g., distribution, manufacturing) in the same profitability calculation invalidates the election.
• Treating safe harbour as a substitute for TP documentation. You must maintain complete transfer pricing documentation even if you opt into safe harbour. The documentation requirement exists independently under Section 171 of the Income-tax Act, 2025 (section 92D of the Income-tax Act, 1961).

Practical Example

NovaTech Inc, a Delaware corporation, has a wholly owned subsidiary in Bangalore — NovaTech India Pvt Ltd — that provides software development services exclusively to the US parent. In tax year 2026-27:

• NovaTech India's operating expense (salaries, rent, technology, overheads) = INR 50 crore
• NovaTech India charges the US parent: INR 58 crore (cost + 16% markup)
• Operating profit = INR 8 crore, an operating profit margin of 16% on operating expense

NovaTech India exercises the option by filing Form No. 49 with the Director General of Income-tax (Systems) by the return due date for tax year 2026-27. Because aggregate operating revenue from the transaction is far below INR 2,000 crore and the margin exceeds the 15.5% prescribed by rule 89(2), the option is valid — and, under rule 91(1), it holds for five consecutive tax years, with the INR 2,000 crore threshold tested only for this first year.

The TPO selects NovaTech India for a transfer pricing audit. Upon reviewing the safe harbour option and confirming the 16% margin, the TPO accepts the transfer price without adjustment. No additional tax demand is issued.

Without safe harbour, the TPO might have benchmarked the transaction using comparable companies earning 22-25% margins, leading to an adjustment of roughly INR 3-4.5 crore and a corresponding tax demand (before interest and penalty risk).

Recent Developments

• The Income-tax Rules, 2026: Notified on 20 March 2026 and in force from 1 April 2026, they replace Rules 10TA to 10TG with rules 86 to 93. A corrigendum issued on 16 April 2026 made only typographical corrections elsewhere in the Rules and did not touch the safe harbour provisions.
• One IT services row: Software development, IT-enabled services, knowledge process outsourcing and software-related contract R&D are merged into a single category at 15.5% of operating expense, with a single INR 2,000 crore ceiling on aggregate operating revenue. The separate 17% / 18% software and ITeS rates, the KPO employee-cost ladder of 24% / 21% / 18%, and the INR 100 crore and INR 300 crore ceilings all ceased to apply after FY 2025-26.
• Data centre services added: A new row at not less than 15% of operating expense, with no equivalent under the 1962 Rules.
• Longer horizons: The rate table is fixed for a three-year block from tax year 2026-27 (rule 89(4)), and the IT services option itself runs for five consecutive tax years (rule 91(1)) — a change from the old annual re-election.
• New form and new filing point: Form No. 49 replaces Form 3CEFA, and for IT services it goes to the DGIT (Systems) rather than the Assessing Officer.

Key Takeaways

• Safe harbour rules provide pre-approved profit margins that protect against transfer pricing adjustments
• Most relevant for IT/ITeS captives, data centres, intra-group loans, corporate guarantees, and auto component manufacturers
• The option is voluntary and made by filing Form No. 49 by the return due date — with the DGIT (Systems) for information technology services, with the Assessing Officer for everything else
• For tax year 2026-27 onwards, rule 89(2) of the Income-tax Rules, 2026 sets a single margin of 15.5% of operating expense for the provision of information technology services — software development, ITeS, KPO and software-related contract R&D together — where aggregate operating revenue from the transaction does not exceed INR 2,000 crore
• The rate table is fixed for a three-year block from tax year 2026-27; the IT services election separately runs for five consecutive tax years
• The 17% / 18% software and ITeS rates and the KPO employee-cost ladder are law only for FY 2025-26 and earlier tax years (Rule 10TD of the Income-tax Rules, 1962, as amended by Notification 21/2025)
• Safe harbour does not replace transfer pricing documentation — both are required
• Foreign investors should evaluate safe harbour alongside APAs for comprehensive TP certainty
• The foreign jurisdiction may not accept the Indian safe harbour margin — coordinate with home-country tax advisors

Want to reduce transfer pricing risk for your Indian subsidiary? Beacon Filing advises on safe harbour elections, transfer pricing documentation, and APA applications for foreign-invested companies.