INCOTERMS 2020 Explained explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Incoterms 2020 are eleven ICC rules that allocate cost, risk, insurance and customs responsibility between seller and buyer. Seven apply to any mode of transport — EXW, FCA, CPT, CIP, DAP, DPU, DDP — and four are for sea and inland waterway only: FAS, FOB, CFR and CIF.
What Incoterms Do and Do Not Do
Incoterms are published by the International Chamber of Commerce and are incorporated into a contract by reference — for example, "FOB Nhava Sheva, Incoterms 2020". They settle four questions:
- Where the seller delivers, and therefore where risk passes to the buyer
- Who arranges and pays for carriage
- Who arranges and pays for insurance
- Who handles export and import clearance and the duties
They do not decide when title or ownership passes, what happens on breach, how payment is made, or which law governs the contract. Those belong in the sale contract. An Incoterm is three letters and a named place; it is not a substitute for a written agreement.
The Seven Rules for Any Mode of Transport
| Rule | Delivery / risk transfers | Carriage paid by | Insurance | Import clearance |
|---|---|---|---|---|
| EXW Ex Works | At seller's premises, goods placed at buyer's disposal, not loaded | Buyer | Neither obliged | Buyer |
| FCA Free Carrier | On handing over to the buyer's carrier at the named place | Buyer | Neither obliged | Buyer |
| CPT Carriage Paid To | On handing over to the first carrier | Seller to destination | Neither obliged | Buyer |
| CIP Carriage and Insurance Paid To | On handing over to the first carrier | Seller to destination | Seller — ICC (A) cover | Buyer |
| DAP Delivered at Place | At named destination, ready for unloading | Seller | Neither obliged | Buyer |
| DPU Delivered at Place Unloaded | At named destination, after unloading | Seller | Neither obliged | Buyer |
| DDP Delivered Duty Paid | At named destination, cleared for import, ready for unloading | Seller | Neither obliged | Seller |
The Four Sea and Inland Waterway Rules
| Rule | Delivery / risk transfers | Carriage paid by | Insurance |
|---|---|---|---|
| FAS Free Alongside Ship | When placed alongside the vessel at the named port | Buyer | Neither obliged |
| FOB Free On Board | When goods are on board the vessel | Buyer | Neither obliged |
| CFR Cost and Freight | When goods are on board — despite seller paying freight onward | Seller to destination port | Neither obliged |
| CIF Cost, Insurance and Freight | When goods are on board | Seller to destination port | Seller — ICC (C) minimum |
The split between risk and cost in CFR and CIF is the single most misunderstood feature of Incoterms. The seller pays freight all the way to the destination port, but risk passes at the origin port when the goods are loaded. If the vessel sinks mid-ocean under CIF, the loss is the buyer's — which is precisely why the seller must insure for the buyer's benefit.
What Changed in the 2020 Revision
- DAT became DPU. "Delivered at Terminal" was renamed "Delivered at Place Unloaded" and freed from the terminal requirement — delivery can now be at any agreed place, so long as the seller unloads.
- CIP insurance was raised. CIP now requires Institute Cargo Clauses (A), all-risks cover. CIF deliberately stayed at Clause (C), reflecting bulk commodity practice.
- FCA got an on-board bill of lading option. The parties may agree that the buyer instructs its carrier to issue an on-board bill of lading to the seller — solving the practical problem that letters of credit demand an on-board bill of lading that an FCA seller previously could not obtain.
- Own-means-of-transport recognised. FCA, DAP, DPU and DDP now acknowledge that a party may carry the goods in its own vehicle rather than engaging a third-party carrier.
- Security-related obligations and costs were allocated more explicitly across the rules.
Choosing the Right Rule
| Situation | Sensible rule | Why |
|---|---|---|
| Containerised goods, buyer arranges shipping | FCA | Risk passes where the seller actually loses control |
| Bulk or break-bulk, buyer arranges vessel | FOB | Loading on board is a real, observable event |
| Seller wants freight margin and control of shipping | CIF or CIP | Seller books carriage; CIP gives the buyer wider insurance |
| Buyer is new and wants a landed price | DAP | Seller delivers to destination but avoids foreign import clearance |
| Seller has an established presence in the destination country | DDP | Only sensible if you can actually clear customs there |
| Buyer collects from your factory | FCA seller's premises | Better than EXW, because the seller handles export clearance |
Mistakes That Cost Indian Exporters Money
- Using FOB for containers. The seller stays on risk from the container yard until loading — often several days of port storage — while having no control over the goods.
- Selling EXW. Under EXW the buyer is responsible for export clearance, but an overseas buyer cannot file an Indian shipping bill. The seller ends up doing it anyway, without the contractual protection FCA would give.
- Agreeing DDP casually. DDP makes the Indian seller the importer of record abroad, liable for foreign duty and often foreign VAT registration. Do not accept it because it sounds like good service.
- Assuming CIF means full insurance. The default is Clause (C), which does not cover theft or water damage. Specify Clause (A) in the contract if that is what is intended.
- Naming a vague place. "CIF Europe" is not a term. The named place must be precise enough to identify the exact delivery point.
- Not stating the edition. Always write "Incoterms 2020". Without it, an old edition may be argued to apply.
Incoterms and Your Other Documents
The Incoterm chosen ripples through everything else. It determines the value declared on the shipping bill and the customs valuation at the other end. It determines who must produce an insurance certificate under a letter of credit. It determines what your marine policy needs to cover, and from what point. And it determines which party bears demurrage and detention when a container sits at the port. Set the Incoterm first; then draft the rest to match it.