CBDT sets 15.5% safe harbour margin for IT services in Income-tax Rules, 2026
Key points
- The Income-tax Rules, 2026 put IT, ITeS, KPO and software R&D in one safe harbour category needing at least a 15.5% margin on costs.
- Indian entities providing these services to a foreign group company can opt in where the transaction's operating revenue is up to ₹2,000 crore.
- In force from 1 April 2026; the IT services option is filed in Form No. 49 by the return due date and runs five years.
The Central Board of Direct Taxes (CBDT) has notified the Income-tax Rules, 2026 (G.S.R. 198(E), dated 20 March 2026), including safe harbour rules for international transactions under the Income-tax Act, 2025. Software development, ITeS, KPO and software-related contract R&D now form one “information technology services” category, needing a margin of at least 15.5% on operating expense where the transaction’s operating revenue is up to ₹2,000 crore. The rules took effect on 1 April 2026.
What has changed
Under rule 89, the tax department accepts the declared transfer price for an eligible international transaction if the option is valid and the condition below is met. The conditions apply for a three-tax-year block from tax year 2026-27, and for later blocks unless modified.
| Transaction | Condition |
|---|---|
| IT services (software development, ITeS, KPO, software R&D) | Margin of at least 15.5% on operating expense; operating revenue up to ₹2,000 crore |
| Rupee loan to a non-resident group company | SBI one-year MCLR on 1 April plus 175 to 625 basis points by credit rating (unrated borrowers only up to ₹100 crore) |
| Foreign currency loan to a non-resident group company | Reference rate on 30 September plus 150 to 600 basis points, by rating and loan size |
| Corporate guarantee to a non-resident wholly owned subsidiary | Commission of at least 1% a year (above ₹100 crore, only if rated adequate to highest safety) |
| Contract R&D for generic pharmaceutical drugs | Margin of at least 24%; operating revenue up to ₹300 crore |
| Export of core / non-core auto components (at least 90% OEM sales) | Margin of at least 12% / 8.5% |
| Receipt of low value-adding intra-group services | Up to ₹10 crore including a mark-up of not more than 5%; cost pooling and allocation keys certified by an accountant |
| Data centre services | Margin of at least 15% |
How the IT services option works
- Once validly exercised, the option runs for five consecutive tax years. The ₹2,000 crore threshold is tested only in the first year.
- Form No. 49, certified by the chief executive officer or chairman and managing director, goes to the Director General of Income-tax (Systems) by the first year’s return due date under section 263(1)(c).
- It is checked electronically, with the result due within two months from the end of the month of filing. Defects can be fixed before any rejection.
- For each of the next four years, a statement of eligible transactions, their value and margins is due by the return due date.
- Withdrawal is allowed only within six months from the end of the first tax year, and the option cannot then be taken again until the five years end.
For other transactions, Form No. 49 goes to the Assessing Officer by the return due date, once the return has been filed.
Other conditions
- For IT services, the Indian entity must carry “insignificant risk”: the foreign principal should perform the key functions, provide funds and intangibles and supervise the work, judged on conduct and not only the contract.
- Operating expense and revenue include ESOP or similar stock-based compensation provided by associated enterprises to the Indian entity’s employees.
- Documentation under section 171 and the accountant’s report under section 172 (Form No. 48) still apply.
- The rules do not cover associated enterprises in territories notified under section 176 or in countries with a maximum income-tax rate below 15%.
- Once a safe harbour price is accepted, the mutual agreement procedure under a tax treaty cannot be invoked.
Who is affected
Indian entities with these transactions with foreign group companies, such as captive IT, ITeS, KPO and R&D units, groups funding overseas subsidiaries and auto component exporters.
What this means for businesses
In practice, a startup whose Indian entity builds software for an overseas parent can have its transfer price accepted for five years by declaring a margin of at least 15.5% on costs, instead of benchmarking every year, if it meets the insignificant-risk test. The trade-offs are a five-year commitment, a short withdrawal window and no treaty dispute resolution. Stock options granted by a foreign parent to Indian employees sit in both operating expense and revenue, so track them for the margin calculation. Review the choice with an adviser before the return due date; this article reflects the rules as published on 20 March 2026.
Key dates
- 1 April 2026: rules in force (tax year 2026-27 onwards).
- Return due date under section 263(1)(c): last date for Form No. 49.
- Six months after the first tax year ends: last date to withdraw the IT services option.
This update was written with AI from the official source above and automatically fact-checked against it before publishing. It is general information, not professional advice. Check the source, or talk to a Chartered Accountant, before acting on it.