Rule 123 of Income 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.
Rule 123 of the Income-tax Rules, 2026 requires a constituent entity of an international group to keep and furnish master file information in Form No. 56 where consolidated group revenue exceeds Rs 500 crore and international transactions exceed Rs 50 crore — or Rs 10 crore for intangible property. Part A is filed even below the thresholds, the records are kept for nine years, and a designated single filer is notified in Form No. 57.
The two-limb threshold — sub-rule (1)
The obligation attaches to every person being a constituent entity of an international group where both limbs are satisfied:
| Limb | Test |
|---|---|
| (a) | Consolidated group revenue of the international group, as reflected in its consolidated financial statement for the accounting year, exceeds Rs 500 crore |
| (b)(i) | Aggregate value of international transactions during the accounting year, as per the books of account, exceeds Rs 50 crore; or |
| (b)(ii) | Aggregate value in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of account, exceeds Rs 10 crore |
Limb (b) is satisfied by either test. A group whose Indian entity has only Rs 22 crore of international transactions is below the Rs 50 crore line — but if Rs 12 crore of that relates to purchase, sale, transfer, lease or use of intangible property, limb (b)(ii) is crossed and the full master file is due. Royalty, licence and cost-contribution flows are exactly the transactions most likely to be tested here.
What must be kept — the fourteen items
Sub-rule (1) then lists the information and documents of the international group to be kept and maintained, lettered (A) to (N).
Structure and business — (A) to (C)
- (A) a list of all entities of the international group along with their addresses;
- (B) a chart depicting the legal status of the constituent entity and the ownership structure of the entire international group;
- (C) a description of the business of the international group during the accounting year, including:
- the nature of the business or businesses;
- the important drivers of profits of those businesses;
- a description of the supply chain for the five largest products or services by revenue, and any other products or services amounting to more than 5% of consolidated group revenue;
- a list and brief description of important service arrangements among members, other than research and development services;
- a description of the capabilities of the main service providers within the group;
- details of the transfer pricing policies for allocating service costs and determining intra-group service prices;
- a list and description of the major geographical markets for the group's products and services;
- a description of the functions performed, assets employed and risks assumed by constituent entities contributing at least 10% of the revenues or assets or profits of the group; and
- a description of important business restructuring transactions, acquisitions and divestments.
Item (C)(VIII) is worth reading twice: the FAR description is owed for every entity above a 10% contribution to revenues or assets or profits. Any one of the three triggers it, so a low-revenue but asset-heavy entity is caught.
Intangible property — (D) to (I)
- (D) the group's overall strategy for the development, ownership and exploitation of intangible property, including the location of principal research and development facilities and their management;
- (E) a list of all group entities engaged in development and management of intangible property, with addresses;
- (F) a list of all important intangible property or groups of intangible property owned by the group, with the names and addresses of the entities that legally own them;
- (G) a list and brief description of important agreements among members related to intangible property, including cost contribution arrangements, principal research service agreements and licence agreements;
- (H) a detailed description of the transfer pricing policies related to research and development and intangible property;
- (I) a description of important transfers of interest in intangible property among group entities, including the names and addresses of the selling and buying entities and the compensation paid.
Financing and financials — (J) to (N)
- (J) a detailed description of the group's financing arrangements, including the names and addresses of the top ten unrelated lenders;
- (K) a list of group entities that provide central financing functions, including their place of operation and of effective management;
- (L) a detailed description of the transfer pricing policies related to financing arrangements among group entities;
- (M) a copy of the annual consolidated financial statement of the international group;
- (N) a list and brief description of the existing unilateral advance pricing agreements and other tax rulings in respect of the group for allocation of income among countries.
Item (J)'s "top ten unrelated lenders" is a specific, checkable number. It is one of the items most often omitted, because the Indian entity does not naturally hold group treasury information.
Filing — sub-rules (2), (3) and (4)
| Sub-rule | Requirement |
|---|---|
| (2) | Furnish the information and documents to the Joint Director referred to in rule 124(1), in Form No. 56, on or before the due date for furnishing the return of income under section 263(1)(c) |
| (3) | The constituent entity shall furnish Part A of Form No. 56 even if the sub-rule (1) conditions are not satisfied |
| (4) | Where more than one constituent entity is required to file, Form No. 56 may be furnished by any one of them if (a) the group has designated that entity, and (b) the designation has been conveyed in Form No. 57 to the Joint Director thirty days before the Form No. 56 due date |
Part A is unconditional. Sub-rule (3) requires it from every constituent entity, threshold or no threshold. A group entity that concludes it is below the limits and files nothing has still missed Part A.
Form No. 57 is thirty days early. The single-filer designation must reach the Joint Director thirty days before the Form No. 56 due date — not with it. A designation conveyed on the filing date does not satisfy sub-rule (4)(b), and every constituent entity is then back to filing individually.
Retention and currency — sub-rules (5) and (6)
- The information and documents must be kept and maintained for nine years from the end of the relevant tax year.
- Consolidated group revenue in foreign currency is converted at the telegraphic transfer buying rate on the last day of the accounting year.
Nine years is longer than the seven-tax-year books-of-account retention in rule 46(9). Master file records therefore outlive the ordinary accounting archive and need their own retention instruction.
Definitions — sub-rule (7)
- "accounting year", "consolidated financial statement" and "international group" — as assigned in section 511(10).
- "telegraphic transfer buying rate" — as assigned in rule 207.
Rule 10DA and rule 123 compared
| Point | Rule 10DA (1962) | Rule 123 (2026) |
|---|---|---|
| Parent provision | Section 92D(4) | Section 171 |
| Revenue threshold | Rs 500 crore | Rs 500 crore |
| Transaction threshold | Rs 50 crore | Rs 50 crore |
| Intangibles threshold | Rs 10 crore | Rs 10 crore |
| Master file form | Form 3CEAA | Form No. 56 |
| Designation intimation | Form 3CEAB | Form No. 57 |
| Designation lead time | Thirty days | Thirty days |
| Retention | Per rule 10DA | Nine years from the end of the relevant tax year |
| Recipient | Joint Commissioner | Joint Director under rule 124(1) |
Compliance checklist
- Test both limbs, and test limb (b) on intangibles separately at Rs 10 crore.
- File Part A of Form No. 56 regardless of the threshold outcome.
- Where a single filer is used, send Form No. 57 thirty days ahead.
- Collect the group-level items — top ten unrelated lenders, central financing entities, unilateral APAs — early; they do not sit with the Indian entity.
- Apply the 10% revenue-or-assets-or-profits test for the FAR descriptions.
- Convert consolidated revenue at the TT buying rate on the last day of the accounting year.
- Set a nine-year retention instruction, separate from the accounting archive.
- Cite rule 123 and section 171, not rule 10DA.
Common mistakes
- Filing nothing because the thresholds are not met. Part A is still due.
- Testing only the Rs 50 crore limb and missing the Rs 10 crore intangibles limb.
- Sending Form No. 57 with Form No. 56 instead of thirty days earlier.
- Omitting item (J) — the top ten unrelated lenders.
- Applying the 10% FAR test to revenue only.
- Destroying the file with the seven-year accounting records.