Rules 87 and 88 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 87 says who can use the safe harbour rules for international transactions: an assessee who has exercised a valid option under rule 90 and falls in one of seven classes. Rule 88 lists the eight kinds of international transaction that qualify. This article reads both as per the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026. Later notifications should be checked.
The eligible assessee is a person who has exercised a valid option under rule 90 and is an IT-services provider with insignificant risk, a lender of an intra-group loan, a giver of a corporate guarantee, a contract research provider on generic pharmaceutical drugs, an auto components exporter with 90% or more of turnover from original equipment manufacturer sales, a recipient of low value-adding intra-group services, or a data centre services provider to a foreign company. Rule 88 then lists the matching transactions, and for a corporate guarantee sets a one hundred crore rupee line.
Where the rules sit
Neither rule names a section. Both belong to the safe harbour group made for section 167 of the Income-tax Act, 2025; our article on sections 167 to 169 on safe harbour rules and advance pricing agreements explains the section. Terms such as "intra-group loan", "corporate guarantee" and "relevant tax year" are defined in rule 86; see our article on the rule 86 definitions. The rates and margins are in rule 89 (safe harbour margins and rates). For an overview of all eight rules, see rules 86 to 93 in one article.
Neither rule names a form. Rule 87(1) points to the option under rule 90, which is exercised in Form 49 (see rules 90 to 93). If you are deciding whether a transaction falls into one of the classes, our tax planning advisory team can test it against the wording.
Rule 87(1): the seven classes
Subject to sub-rules (2) and (3), "eligible assessee" means a person who has exercised a valid option for the safe harbour rules in accordance with rule 90, and who:
| Clause | Class |
|---|---|
| (a) | is engaged in providing information technology services, being any one or more of software development services, information technology enabled services, knowledge process outsourcing services, or contract research and development services wholly or partly relating to software development, with insignificant risk, to a non-resident associated enterprise (the "foreign principal") |
| (b) | has made any intra-group loan |
| (c) | has provided a corporate guarantee |
| (d) | is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal |
| (e) | is engaged in the manufacture and export of core or non-core auto components, and 90% or more of the total turnover in the relevant tax year is original equipment manufacturer sales |
| (f) | is in receipt of low value-adding intra-group services from one or more members of its group |
| (g) | has provided data centre services to a foreign company |
The option is the gateway: without a valid option under rule 90, none of the seven classes is an eligible assessee.
Rule 87(2): insignificant risk for class (a)
To identify an eligible assessee with insignificant risk under clause (1)(a), the Director General of Income-tax (Systems) shall have regard to five factors.
| Factor | What it asks |
|---|---|
| (a) | The foreign principal performs most of the economically significant functions, including critical functions such as conceptualisation, design of the product and strategic direction, through its own employees or other associated enterprises, while the assessee carries out the assigned work |
| (b) | The foreign principal or its other associated enterprises provide the capital, funds and other economically significant assets including intangibles; the assessee receives only remuneration |
| (c) | The assessee works under the direct supervision of the foreign principal or its associated enterprise, which has the capability to control and actually controls or supervises research or product development through strategic decisions and regular monitoring |
| (d) | The assessee assumes no economically significant realised risks; if the contract says the foreign principal controls the risk but conduct shows the assessee does, the contract is not the final determinant |
| (e) | The assessee has no legal or economic ownership of any intangible generated or the outcome of the research, which vests in the foreign principal as shown by contract and conduct |
Rule 87(3): insignificant risk for class (d)
For clause (1)(d), the Director General of Income-tax (Systems), or the Assessing Officer or the Transfer Pricing Officer as the case may be, shall have regard to the same five factors, worded for the research or product development cycle. Differences from sub-rule (2): factor (b) is split into funds or capital, other economically significant assets including intangibles required for research or product development, and remuneration for the work; factor (e) speaks of ownership of "the outcome of the research" only. The authority is wider too: sub-rule (3) names the Assessing Officer and the Transfer Pricing Officer in addition to the Director General.
Rule 88: the eight eligible international transactions
An "eligible international transaction" is an international transaction between the eligible assessee and its associated enterprise, one of which is necessarily a non-resident, and which comprises:
| Clause | Transaction |
|---|---|
| (a) | Provision of information technology services: software development, information technology enabled services, knowledge process outsourcing or contract research and development relating to software development |
| (b) | Advance of an intra-group loan |
| (c) | Provision of a corporate guarantee, where the amount covered by the guarantee (i) does not exceed one hundred crore rupees, or (ii) exceeds one hundred crore rupees and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety |
| (d) | Provision of contract research and development services relating to generic pharmaceutical drugs |
| (e) | Manufacture and export of core auto components |
| (f) | Manufacture and export of non-core auto components |
| (g) | Receipt of low value-adding intra-group services from one or more members of its group |
| (h) | Provision of the data centre services |
The rating agency requirement refers to a body registered with the Securities and Exchange Board of India; check the regulations that govern such agencies. The rule does not say what rating grades are meant beyond the words "adequate to highest safety".
Example 1. Bluewave Analytics Private Limited (invented) prepares analytics reports for its overseas parent. The parent decides what is to be built, supplies the tools and funds, supervises the work and owns the output; Bluewave is paid a remuneration. Those are the facts the factors in rule 87(2) look for. If Bluewave has exercised a valid option under rule 90, it falls in clause (1)(a), and the services are an eligible international transaction under rule 88(a).
Example 2. Cedar Motors Limited (invented) guarantees the borrowing of its wholly owned overseas subsidiary. If the amount covered by the guarantee is within one hundred crore rupees, rule 88(c)(i) applies. If it is above that line, the overseas subsidiary must carry a credit rating from a SEBI-registered agency of "adequate to highest safety" under rule 88(c)(ii).
Who is affected
Assessees with cross-border services, loans, guarantees, auto component exports, intra-group services or data centre services; the Director General of Income-tax (Systems), the Assessing Officer and the Transfer Pricing Officer who apply the insignificant-risk factors. If a class or transaction does not fit, rule 87 and rule 88 do not give safe harbour; the rules do not say what follows beyond that.
Need help with eligibility?
Whether a transaction is truly low risk, or whether a guarantee crosses the line in rule 88(c), turns on the facts and the contract. Our tax planning advisory team can review the facts against rules 87 and 88 before an option is exercised.
Key takeaways
- The eligible assessee must have exercised a valid option under rule 90.
- There are seven classes in rule 87(1), (a) to (g); classes (a) and (d) turn on insignificant risk.
- Insignificant risk is judged on five factors: functions, funding and assets, supervision, risk, and ownership of intangibles.
- Auto components exporters need 90% or more of turnover from original equipment manufacturer sales.
- Rule 88 lists eight transactions; a corporate guarantee above one hundred crore rupees needs a rating of adequate to highest safety.
- Both rules print no margin; margins are in rule 89.
Read next
- Rule 86: safe harbour definitions
- Rule 89: safe harbour margins and rates
- Rules 90 to 93: procedure and exclusions
- Rules 94 to 98: safe harbour for specified domestic transactions
Disclaimer: Based on the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026, as consulted on 2 October 2026. It explains the words of the rules and forms only; later notifications, the forms and utilities on the e-filing portal, circulars and the way the tax authorities apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.