Rules 86 to 93 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.
Rules 86 to 93 of the Income-tax Rules, 2026 set the safe harbour regime under section 167. Rule 88 lists eight eligible transactions, rule 89 fixes the margins and rates — 15.5% for IT services up to Rs 2,000 crore of operating revenue, 15% for the new data centre services category, 24% for generic pharmaceutical contract research, 12% and 8.5% for core and non-core auto components, and 1% per annum for corporate guarantees — and the regime runs for a block of three tax years from 2026-27.
The eight structure
| Rule | What it does |
|---|---|
| 86 | Definitions for rules 87 to 93 |
| 87 | Who is an eligible assessee, including the insignificant-risk tests |
| 88 | What is an eligible international transaction |
| 89 | The safe harbour margins and rates, and the reference rate and credit rating definitions |
| 90 | Procedure for transactions other than IT services |
| 91 | Procedure for IT services — the five-year regime |
| 92 | Exclusion for notified and no-tax or low-tax jurisdictions |
| 93 | Bar on the mutual agreement procedure where safe harbour is accepted |
Rule 88 — the eight eligible international transactions
An eligible international transaction is one between the eligible assessee and its associated enterprise, one of which is necessarily a non-resident, comprising:
- (a) provision of information technology services, consisting of 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;
- (b) advance of intra-group loan;
- (c) provision of corporate guarantee, where the amount guaranteed (i) does not exceed Rs 100 crore, or (ii) exceeds Rs 100 crore and the credit rating of the associated enterprise, by a SEBI-registered agency, is of the adequate to highest safety;
- (d) provision of contract research and development services wholly or partly 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 data centre services.
Clause (h) has no counterpart in the earlier safe harbour list. With rule 89 Sl. No. 9 setting a 15% operating margin for it and rule 86(e) and (f) defining "data centre" and "data centre services", the regime now reaches a sector that previously had to benchmark from scratch. For an Indian data centre serving a foreign group company, this is the single most consequential change in the 2026 safe harbour rules.
Rule 89 — the rates, in full
The transfer price declared by an eligible assessee is accepted by the income-tax authorities if the option is not held invalid under rule 90 and the declared price meets the circumstances below.
Margin-based safe harbours
| Sl. | Eligible international transaction | Circumstance |
|---|---|---|
| 1 | Provision of information technology services | Operating profit margin to operating expense not less than 15.5%, where aggregate operating revenue of the transaction in the tax year does not exceed Rs 2,000 crore |
| 5 | Contract research and development services wholly or partly relating to generic pharmaceutical drugs | Operating profit margin to operating expense not less than 24%, where aggregate operating revenue does not exceed Rs 300 crore |
| 6 | Manufacture and export of core auto components | Operating profit margin to operating expense not less than 12% |
| 7 | Manufacture and export of non-core auto components | Operating profit margin to operating expense not less than 8.5% |
| 9 | Provision of data centre services | Operating profit margin to operating expense not less than 15% |
Note that Sl. Nos. 6, 7 and 9 carry no revenue ceiling, while Sl. Nos. 1 and 5 do.
Sl. No. 2 — intra-group loans in Indian rupees
Interest not less than the one-year marginal cost of funds lending rate of the State Bank of India as on 1 April of the relevant tax year, plus:
| Credit rating of the associated enterprise | Spread |
|---|---|
| Between AAA to A or equivalent | 175 basis points |
| BBB-, BBB or BBB+ or equivalent | 325 basis points |
| Between BB to B or equivalent | 475 basis points |
| Between C to D or equivalent | 625 basis points |
| Credit rating not available, and the aggregate rupee loans to all associated enterprises do not exceed Rs 100 crore as on 31 March of the relevant tax year | 425 basis points |
Sl. No. 3 — intra-group loans in foreign currency
Interest not less than the reference rate of the relevant foreign currency as on 30 September of the relevant tax year, plus a spread that depends on the aggregate loan size as on 31 March of the relevant tax year:
| Credit rating | Aggregate loans up to Rs 250 crore equivalent | Aggregate loans exceeding Rs 250 crore equivalent |
|---|---|---|
| AAA, AA+, AA, AA-, A+, A, A- or equivalent | 150 bps | 150 bps |
| BBB+, BBB, BBB- or equivalent | 300 bps | 300 bps |
| BB+, BB, BB-, B+, B, B- or equivalent | 400 bps (this band also covers C+, C, C-, D or equivalent, and the case where no credit rating is available) | 450 bps |
| C+, C, C-, D or equivalent, or no credit rating available | 600 bps |
The two size bands are identical at investment grade and diverge sharply below it — an unrated borrower costs 400 basis points on a book up to Rs 250 crore and 600 basis points above it.
Sl. No. 4 — corporate guarantee
Commission or fee not less than 1% per annum on the amount guaranteed.
Sl. No. 8 — low value-adding intra-group services
The aggregate amount of such services during the tax year, including a mark-up not exceeding 5%, does not exceed Rs 10 crore, and the following are certified by an accountant:
- the method of cost pooling;
- the exclusion of shareholder costs and duplicate costs from the cost pool; and
- the reasonableness of the allocation keys used for allocating costs to the assessee by the overseas associated enterprise.
Rule 86(a) defines "accountant" for this purpose far more narrowly than section 515(3)(b) alone. An individual practitioner or valuer must have professional experience of not less than ten years and annual receipts exceeding Rs 50 lakh in the preceding year; a member or partner of an accountancy or valuation entity qualifies where the entity's annual receipts in the preceding year exceed Rs 3 crore. A foreign professional recognised for cost certification by the government of the associated enterprise's country may also certify, on the same experience and receipts conditions, and where the entity or its affiliates have presence in more than two countries. Check the certifier against these tests before relying on the row.
Rule 89(3) — the reference rates and credit rating
| Currency | Reference rate |
|---|---|
| US dollar | 6-month Term Secured Overnight Financing Rate (SOFR), administered by Chicago Mercantile Exchange, increased by 45 basis points |
| Euro | 6-month Euro Inter Bank Offered Rate (EURIBOR), administered by European Money Markets Institute |
| UK Pound Sterling | 6-month Term Sterling Overnight Index Average (SONIA), administered by ICE Benchmark Administration or Refinitiv, increased by 30 basis points |
| Japanese Yen | 6-month Tokyo Term Risk Free Rate (TORF), benchmarked by QUICK Benchmarks Inc, increased by 10 basis points |
| Australian dollar | 6-month Bank Bill Swap Rates (BBSW), administered by Australian Securities Exchange |
| Singapore dollar | 6-month Compounded Singapore Overnight Rate Average (SORA), administered by Monetary Authority of Singapore, increased by 45 basis points |
Credit rating means the rating assigned to the associated enterprise by a SEBI-registered and RBI-accredited credit rating agency applicable for the relevant tax year. Where there is one rating, that is the rating; where there are more than one, the least of them is taken.
These reference rates also feed rule 83(2)(b) — the secondary adjustment interest rate for foreign currency transactions is defined by cross-reference to rule 89(3).
The block period and two consequences — rule 89(4) to (6)
- (4) Sub-rules (1) and (2) apply for a block period of three tax years commencing from tax year 2026-2027, and continue to apply for subsequent block periods unless modified.
- (5) No comparability adjustment and no allowance under section 165(3)(a)(ii) shall be made to a transfer price declared and accepted under safe harbour.
- (6) Sections 171 and 172 continue to apply irrespective of the safe harbour election.
Sub-rule (6) is the one that surprises people: electing safe harbour does not relieve the taxpayer of the rule 84 documentation under section 171 or the Form No. 48 accountant's report under section 172. Safe harbour removes the pricing dispute; it does not remove the compliance.
Rule 87 — the eligible assessee and the insignificant-risk tests
An eligible assessee is a person who has exercised a valid option under rule 90 and who:
- (a) provides information technology services — software development, IT enabled services, knowledge process outsourcing, or contract research and development 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) provides contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal;
- (e) manufactures and exports core or non-core auto components, where 90% or more of total turnover in the relevant tax year is original equipment manufacturer sales;
- (f) is in receipt of low value-adding intra-group services; or
- (g) has provided data centre services to a foreign company.
The five insignificant-risk factors
For clauses (a) and (d), the same five factors are applied:
- the foreign principal performs most of the economically significant functions, including the critical functions of conceptualisation, design of the product, and providing strategic direction and framework, while the eligible assessee carries out the work assigned to it;
- the capital, funds and other economically significant assets including intangibles are provided by the foreign principal or its associated enterprises, and the assessee is only remunerated for the work carried out;
- the assessee works under the direct supervision of the foreign principal, which not only has the capability to control or supervise but actually controls or supervises, through strategic decisions and regular monitoring;
- the assessee does not assume or has no economically significant realised risks — and where the contract says the foreign principal controls the risk but the conduct shows the assessee does, the contractual terms are not the final determinant;
- the assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of the research, which vests with the foreign principal as evident from the contract and the conduct of the parties.
Factors 4 and 5 both say so expressly. A well-drafted services agreement placing all risk and all intangible ownership with the foreign principal is not sufficient if the Indian entity's actual conduct shows it bearing the risk or generating and controlling intangibles. Anyone electing safe harbour on clause (a) or (d) should test the conduct evidence — approval trails, who signs off on scope, where the intellectual property is registered — not just the contract.
Rule 90 — procedure for everything except IT services
| Step | Requirement |
|---|---|
| Exercise | Form No. 49, complete in all respects, to the Assessing Officer on or before the section 263(1)(c) due date; and the return must be furnished on or before the date of furnishing Form No. 49 |
| Verification | The Assessing Officer verifies that the assessee is an eligible assessee and the transaction an eligible international transaction |
| Reference | Where he doubts valid exercise, he refers to the Transfer Pricing Officer — within two months from the end of the month Form No. 49 is received |
| Invalidity order | The Transfer Pricing Officer may declare the option invalid, after a reasonable opportunity of being heard — within two months from the end of the month the reference is received |
| Objection | To the Commissioner, within fifteen days of receipt of the order; the Commissioner passes orders within two months from the end of the month the objection is received |
| Deemed valid | If no reference or order is made within those periods, the option is treated as valid |
| Where valid | The Assessing Officer verifies the declared price against the rule 89(2) circumstances and, if it falls short, adopts the margin, interest rate or commission specified there |
| Form mechanics | Furnished electronically under digital signature or through electronic verification code, verified by the person authorised to verify the return under section 265 |
The deemed-valid rule in sub-rule (10) is a real protection: silence from the department within the stated periods validates the option. Note too the sequencing requirement — the return must be filed on or before the date Form No. 49 is filed, not after.
Rule 91 — the separate five-year regime for IT services
For IT services the architecture is different, and materially more generous:
- A validly exercised option remains in force for five consecutive tax years.
- The Rs 2,000 crore aggregate operating revenue threshold is tested for the first of the five years only.
- Form No. 49 goes to the Director General of Income-tax (Systems) — not the Assessing Officer — for the first of the five years, by the section 263(1)(c) due date.
- Verification of eligibility and validity is electronic, and the assessee is intimated of acceptance or rejection within two months from the end of the month the option is exercised.
- An option shall not be rejected unless the assessee is given an opportunity to remove defects, and a rejection must carry reasons.
- Where accepted, the assessee must furnish returns in accordance with the safe harbour provisions for each of the five years by the section 263(1)(c) due date.
- Withdrawal is by declaration, and cannot be made after six months from the end of the first tax year. On withdrawal the option ceases for that year and subsequent years — and the assessee cannot exercise the option again until the five consecutive tax years have expired.
- For each of the four years following the first, a statement of eligible transactions, their quantum and profit margins is furnished by the section 263(1)(c) due date.
- Form No. 49 is certified by the chief executive officer or chairman and managing director and verified by the section 265 signatory.
Testing the Rs 2,000 crore threshold once, in year one, is a significant benefit for a growing IT services exporter — growth past the threshold in years two to five does not break the safe harbour. But the withdrawal rules are strict: six months from the end of the first tax year is the only exit, and using it locks the assessee out for the remainder of the five-year period. The decision has to be made on a five-year view, not a one-year one.
Rules 92 and 93 — the two exclusions
- Rule 92. Nothing in rules 86 to 91 applies to eligible international transactions with an associated enterprise located in any country or territory notified under section 176, or in a no tax or low tax country or territory.
- Rule 93. Where the declared transfer price is accepted under section 167, the assessee shall not be entitled to invoke the mutual agreement procedure under a double taxation avoidance agreement referred to in section 159.
Rule 93 is the real price of certainty. Safe harbour resolves the Indian side of the pricing question and closes the treaty route to relieving any economic double taxation that remains on the other side. Where the counterparty jurisdiction is likely to make its own adjustment, that trade-off has to be priced into the decision before Form No. 49 is filed.
Compliance checklist
- Match the transaction to a rule 88 clause and the assessee to a rule 87 clause — both must be satisfied.
- For IT services and generic pharma contract research, test the five insignificant-risk factors against conduct, not only the contract.
- For auto components, confirm 90% or more of total turnover is OEM sales.
- Check the correct rule 89 margin or rate, and whether a revenue ceiling applies to that row.
- For loans, fix the credit rating on the least of multiple ratings and use the 1 April MCLR or the 30 September reference rate.
- For low value-adding services, confirm the Rs 10 crore including mark-up not exceeding 5% and that the certifier meets the rule 86(a) experience and receipts tests.
- File Form No. 49 by the section 263(1)(c) due date, with the return filed on or before it under rule 90.
- For IT services, file to the Director General (Systems), get CEO or CMD certification, and calendar the four annual statements.
- Keep the rule 84 documentation and Form No. 48 — rule 89(6) preserves both.
- Screen the counterparty jurisdiction against rule 92, and weigh the rule 93 loss of the mutual agreement procedure.
Common mistakes
- Assuming safe harbour removes the documentation and Form No. 48 obligations. Rule 89(6) says otherwise.
- Relying on contractual risk allocation where conduct points the other way.
- Using the highest of multiple credit ratings. Rule 89(3)(b)(ii) takes the least.
- Applying the Rs 2,000 crore IT services threshold to every year of a rule 91 five-year option.
- Filing Form No. 49 before the return under rule 90 — the return must come first.
- Having the low value-adding services certificate signed by a professional who does not meet rule 86(a).
- Electing safe harbour where the counterparty jurisdiction may adjust, and losing the mutual agreement procedure under rule 93.
- Overlooking the six-month withdrawal deadline in rule 91.