Rule 125 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 125 of the Income-tax Rules, 2026 requires a Form No. 61 authorisation and four extra classes of document for a notified jurisdictional area transaction; rule 126 lists what an IFSC finance company may do.
The Form No. 61 authorisation under rule 125
Sub-rules (1) to (4) of rule 125 set out a four-step mechanism for section 176(3)(a). The 1962 parallel is rule 21AC.
| Step | Requirement |
|---|---|
| 1 | The authorisation to be submitted by the assessee shall be in Form No. 61 |
| 2 | The assessee shall cause the first copy to be deposited with or transmitted to the financial institution referred to in section 176(3)(a) |
| 3 | The second copy, along with evidence of the first copy having been deposited or transmitted, shall be submitted to the Assessing Officer having jurisdiction over the assessee |
| 4 | To ensure the authorisation is legally enforceable, the assessee shall take all necessary steps as are required under any law in force in India or outside India |
Steps 1 to 3 of rule 125 are mechanical. Step 4 is not: the assessee must take all necessary steps under any law in force in India or outside India to make the authorisation enforceable. Depending on the jurisdiction of the financial institution that may mean notarisation, apostille, local registration, or a consent formality under the foreign bank secrecy regime. Filing Form No. 61 with the Assessing Officer while the foreign-law steps are outstanding leaves the requirement unsatisfied.
The additional documents rule 125 requires
Sub-rule (5): an assessee who has entered into a transaction with a person located in a notified jurisdictional area — the specified person — shall, in addition to the information and documents referred to in rule 84(1), keep and maintain:
- a description of the ownership structure of the specified person, including the name and address of individuals or other entities, whether located in the notified jurisdictional area or outside, having directly or indirectly more than 10% shareholding or ownership interests;
- a profile of the multinational group of which the specified person is part, with the name, address, legal status and country of tax residence of each enterprise in the group with whom the assessee has entered into a transaction, and the ownership linkage among them;
- a broad description of the business of the specified person and the industry it operates in; and
- any other information, data or document which may be relevant for the transaction with the specified person.
| Point | Provision |
|---|---|
| Period covered | Sub-rule (6): up to the due date of filing the return under section 263(1) |
| Retention | Sub-rule (7): eight years from the end of the financial year succeeding the relevant tax year |
Item (a) of rule 125 requires direct or indirect holders above 10% to be named, wherever they are located — the notified jurisdictional area is where the counterparty sits, not a limit on where the owners are traced. Item (b) then widens the file to the whole multinational group, but only for the enterprises with whom the assessee has transacted. Assembling either after the transaction has closed is usually impossible, so the documentation has to be a condition of dealing rather than a year-end exercise.
Rule 126 — the IFSC finance company
For section 177(7)(b), a finance company located in an International Financial Services Centre shall carry out only one or more of the following activities. The 1962 parallel is rule 21ACA.
| # | Activity |
|---|---|
| (a) | Lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, or financial lease |
| (b) | Factoring and forfaiting of receivables |
| (c) | Functions of a Global or Regional Corporate Treasury Centre — borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other treasury services and activities |
Sub-rule (2): the interest being paid by such finance company, being the borrower, in respect of any debt issued by a non-resident, shall be in foreign currency.
Sub-rule (3) supplies two definitions — a "finance company" as defined in regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021, and an "International Financial Services Centre" as in section 2(q) of the Special Economic Zones Act, 2005.
The word in rule 126 is "only". A finance company that adds an activity outside the three heads — advisory, broking, asset management — steps outside the rule for section 177(7)(b), however small the additional line. The treasury head at (c) is the widest, closing with "and similar other such treasury services and activities", but it is still a treasury head and does not open the list generally.
Worked example
| Facts | Position |
|---|---|
| Indian company transacts with an entity in a notified jurisdictional area | Rule 125 documents required in addition to rule 84(1) |
| A 12% indirect owner of the specified person sits in a third country | Named — item (a) is not confined to the notified area |
| Group has thirty entities; the assessee transacted with four | Profile required for those four, with ownership linkages |
| Return due 31 October 2027 for tax year 2026-27 | Documents cover the period to that due date; retained eight years from 31 March 2028 |
| Form No. 61 filed with the Assessing Officer but not transmitted to the financial institution | Incomplete — the first copy must reach the institution and evidence accompany the second |
| IFSC finance company doing lending and treasury functions | Within rule 126 |
| The same company adds an investment advisory business | Outside the exhaustive list |
| Interest to a non-resident lender paid in rupees | Fails sub-rule (2) |
Compliance checklist
- File Form No. 61 and route the first copy to the financial institution.
- Submit the second copy with evidence of transmission to the jurisdictional Assessing Officer.
- Complete any foreign-law steps needed to make the authorisation enforceable.
- Collect the ownership structure above 10%, direct and indirect, wherever located.
- Build the group profile for every transacting enterprise, with linkages.
- Document the specified person's business and industry.
- Keep everything up to the section 263(1) due date and retain it for eight years.
- For an IFSC finance company, confine activities to the three heads in rule 126.
- Ensure interest on non-resident debt is paid in foreign currency.
Common mistakes
- Tracing ownership only within the notified jurisdictional area.
- Profiling the whole group or none of it, instead of the transacting enterprises.
- Filing Form No. 61 without the institution copy or its evidence.
- Destroying the file before eight years have run.
- Adding a non-listed activity to an IFSC finance company.