CBDT Raises the Safe Harbour Rules Threshold to ₹300 Crore

Introduction: Quiet Reform, Major Relief

A filing team that last elected India’s safe harbour rules signed Form 3CEFA. Since 1 April 2026 that election goes in Form No. 49, a single electronic form that merged Forms 3CEFA, 3CEFB and 3CEFC, and it now sits under Rules 86 to 102 of the Income-tax Rules, 2026 (CBDT’s Form 49 note).

What the form buys was rebuilt in the same rewrite. From tax year 2026-27 an IT services provider declares an operating margin of 15.5% under Rule 89(2), holds aggregate operating revenue inside ₹2,000 crore, and has the declared price accepted without a comparables search. A five-year option and a bar on any comparability adjustment come with it.

This note began in March 2025, when Notification 21/2025 raised the Rule 10TD(2A) limit to ₹300 crore (Notification 21/2025). That amendment pulled more mid-sized groups into the programme and left the margins untouched. The 2026 Rules moved both figures, so the ₹300 crore band now describes earlier assessment years only.

The election turns on who may elect, the margin each category of transaction has to reach, the revenue ceiling attached to that margin, and what the Assessing Officer does when a declared margin falls short. For most groups the ceiling that decides the question is the ₹2,000 crore in Rule 89(2).

What Are Safe Harbour Rules, and Why Are They Important?

A safe harbour is a set of circumstances in which the income-tax authorities must accept the transfer price or the income a taxpayer declares, instead of testing it against comparables. Section 167 of the Income-tax Act, 2025 puts it that way, and acceptance is mandatory once the conditions are met.

The Income-tax Rules, 2026 gather those circumstances into three streams under Rules 86 to 102. International transactions sit in Rules 86 to 93, specified domestic transactions in Rules 94 to 98, and the attribution of income to a foreign company under section 9(2) in Rules 99 to 102. This note deals with the first stream, where a filing team meets Form 49.

The programme buys the end of an argument about comparables. Once a price is accepted, Rule 89(5) allows no comparability adjustment and no tolerance band or range allowance to be applied to it (TaxGuru’s rule-by-rule commentary). Where the option is validly exercised, no reference goes to the Transfer Pricing Officer, although the Assessing Officer still verifies that the assessee and the transaction qualify.

The paperwork survives the election. Sections 171 and 172 apply in every case, so the documentation file and the accountant’s report in Form 48 are still due (the Form 48 documentation shift). A group that elects carries two obligations into the assessment: the margin it declared, and the file that supports that margin.

Why that matters to a mid-sized group comes down to cost and time. A benchmarked determination asks for a comparable search, an economic study and a defence of both, and the defence is what takes the years. An election replaces that argument with a number the group either meets or does not.

Rule 87(1) defines an eligible assessee by the work it does, and it expects the option to have been validly exercised under Rule 90, or under Rule 91 where the transaction is IT-enabled services. The categories run to seven: an IT services provider, an intra-group lender, a corporate guarantor, a pharma contract R&D provider, an auto component manufacturer selling at least 90% of turnover to original equipment manufacturers, a recipient of low value-adding intra-group services, and a data centre service provider (Rule 87(1)).

For the two service categories, eligibility turns on risk rather than on the size of the balance sheet. Rule 87(2) asks the Director General of Income-tax (Systems) to weigh five factors: who performs the economically significant functions, who supplies the capital and the intangibles, who supervises the work, who carries the realised risk, and who owns the intellectual property the work generates. Rule 87(3) applies the same five factors to pharma contract R&D. The rules let conduct override the contract where the two diverge, and most eligibility disputes will start in that gap.

A transaction must also be an eligible international transaction under Rule 88, and its counterparty must be a non-resident associated enterprise. A loan drops out where the lender is a financial company or the facility carries no fixed repayment term. A corporate guarantee qualifies where the amount guaranteed does not exceed ₹100 crore (Rule 88), or above that where the associated enterprise holds a credit rating adequate to the highest safety.

The programme is not open to every group that qualifies on paper. Rule 92 switches safe harbour off entirely for a transaction with an associated enterprise in a notified jurisdictional area under section 176, or in a country whose maximum rate of income-tax is below 15% (Rule 92).

The other two streams are narrower in subject. The specified domestic stream in Rules 94 to 98 covers electricity supply, transmission and wheeling and the purchase of milk or milk products. The income attribution stream in Rules 99 to 102 covers eligible business, which Form 49 lists as raw diamond sales and specified warehouse storage activities.

What Exactly Changed in the 2025 Amendment?

The date to hold on to is 25 March 2025. Notification 21/2025 substituted the word three for the word two at serial numbers 1, 2, 3, 7 and 8 of the Rule 10TD(2A) table, which moved the ceiling from ₹200 crore to ₹300 crore for assessment years 2025-26 and 2026-27 (Notification 21/2025). The Board’s stated reason was tax certainty for assessees opting for the programme, and nothing in the notification touched a margin.

Until that point the 1962 Rules had scaled the margin to the size of the transaction. A software developer below ₹100 crore of transaction value reported at 17%, and between ₹100 crore and ₹200 crore at 18% (Rule 10TD as reproduced by ICAI). A reader who meets those numbers in an older note is looking at the 1961 Act’s regime, which no longer governs the election.

The second step came on 1 April 2026, and it moved both figures at once. The Income-tax Rules, 2026 replaced Rules 10TA to 10TIC with the safe harbour cluster, and section 167 of the 2025 Act replaced section 92CB of the 1961 Act as the enabling provision (the Form 49 note). With the rewrite came one consolidated margin for services and a ceiling far above ₹300 crore.

The safe harbour threshold for IT services is now an operating profit margin of 15.5% on operating expense, available where aggregate operating revenue from the covered transactions does not exceed ₹2,000 crore in the relevant tax year (Rule 89(2)). That single line covers software development services, IT-enabled services, knowledge process outsourcing and contract R&D relating to software, which the 2026 Rules consolidated into one category (the practitioner analysis of the 2026 regime). The consolidation is worth spelling out, because those four entries used to carry separate margins in separate rows.

Every row in the table below comes from the Rule 89(2) threshold table, and Rules 90 and 91 set the procedure that applies to each category (Rules 89 to 91 as reproduced).

Pharma contract R&D kept a row of its own and a ceiling of ₹300 crore, which is the only place the March 2025 figure still operates. A technology group whose IT services revenue sat between ₹300 crore and ₹2,000 crore was outside the programme in March 2025 and is inside it now.

The low value-adding row and the foreign currency loan row each carry a condition that a filing team can miss. The first is a receipt, capped at ₹10 crore, and an accountant certifies the cost pool, the exclusions and the allocation keys behind it. The second is priced off a reference rate fixed on 30 September, and the spread steps up as the associated enterprise’s credit rating falls.

The reference rates in Rule 89(3) are the post-LIBOR set: six-month term SOFR plus 45 basis points for the dollar, six-month EURIBOR for the euro, six-month term SONIA plus 30 basis points for sterling, six-month TORF plus 10 basis points for the yen, six-month BBSW for the Australian dollar and six-month compounded SORA plus 45 basis points for the Singapore dollar (Rule 89(3)). A note that still quotes LIBOR as the loan benchmark is out of date.

Every margin in the table is measured as operating profit over operating expense, so the definition matters before a group tests its own accounts. Operating expense includes reimbursements to associated enterprises at cost and stock-based compensation given to employees, and leaves out interest, provisions for unascertained liabilities and foreign currency fluctuation losses (Rule 86(n) and Rule 86(p), in the same commentary). A margin built on a different base can miss the threshold by a couple of points.

The table applies for a block period of three tax years beginning with tax year 2026-27, and later blocks follow unless the Board changes it (Rule 89(4)). For an IT services provider the commitment runs longer, at five consecutive tax years, and the ₹2,000 crore ceiling is tested in the first year alone (Rule 91(1) and Rule 91(2)). The 15.5% comparison for Indian IT captives sets that five-year trade-off against an APA in full.

A group with an open assessment still needs the older figures. Notification 21/2025 was made under section 92CB of the 1961 Act and applies to assessment years 2025-26 and 2026-27, so the ₹300 crore ceiling governs those two years while the 2026 Rules govern the years after. A return for either of those years is tested under the 1961 Act, whenever it is filed.

Why This Matters: Decoding the Policy Signal

1. More Businesses Can Now Access Certainty

This is a deliberate recalibration. Many Indian service providers in tech, pharma and R&D now cross ₹200 crore. They still run lean structures and need tax predictability. Raising the limit to ₹300 crore accepts that.

The update broadens eligibility without diluting the framework. Mid-market players now get the certainty once reserved for smaller entities.

2. A Step Towards Litigation Reduction

Transfer pricing disputes are among the largest sources of tax litigation in India. Safe harbour provisions, well designed, can cut that burden. A higher limit means more taxpayers will opt in. That includes those wary of a long and costly appeal.

3. Keeping India Competitive as a Global Services Hub

Singapore and Ireland have long offered simple, low-risk tax environments. That has drawn global service delivery work to them. India is now widening its safe harbour net. The signal is that it competes on tax stability, not only on talent and cost.

This matters for IT services, pharma R&D and KPO, where India is a global leader.

What Should Businesses Do Now?

The election is filed with the return, so the sequence starts earlier than many groups assume. Form No. 49 goes in electronically through the e-filing portal, under digital signature or with an electronic verification code (the Form 49 note).

1. Confirm that the assessee and the transaction qualify. The Assessing Officer verifies both under Rule 90(2) before the option is treated as validly exercised, so a group should make that check itself first.

2. Build the file before the form. Form 49 asks for the documents prescribed under section 171, the accountant’s report and certificate, and credit rating information for the associated enterprise wherever the transaction is a loan or a guarantee.

3. File in the right forum by the right date. An IT services provider files with the Director General of Income-tax (Systems) for the first of five consecutive tax years, on or before the return due date under section 263(1)(c), and the form carries a chief executive or managing director certification as well as the usual verification (Rule 91(3) and Rule 91(16)). Every other category files with the Assessing Officer by the same due date, with the return furnished on or before the date of filing (Rule 90(1)).

4. Keep filing through the block. For years two to five the IT services provider files the return on time each year and adds a statement of the eligible transactions, their quantum and the margins (Rule 91(8) and Rule 91(13)).

5. Watch the clock on validity. The reference to the Transfer Pricing Officer, that officer’s order and the Commissioner’s order on an objection each carry a two-month limit, and a missed deadline leaves the option valid by default (Rule 90(9) and Rule 90(10)). The Director General has two months to accept or reject an IT services filing, and a rejection must give the assessee a chance to cure the defect (Rule 91(5) and Rule 91(6)).

6. Treat withdrawal as a single window. A declaration within six months of the end of the first tax year ends the option for that year and every later year of the block, and the option cannot be exercised again until the five years expire (Rule 91(9) to Rule 91(12)).

A group that files first and assembles the file afterwards is exposed on the same points as a group that never benchmarked. The dates that decide an election sit in the timetable: the return due date, the Director General’s two months on an IT services filing, and the six months for a declaration. Groups that closed the last Form 3CEB season will recognise the shape of the file, because the work of assembling it did not change with the form number.

The election is not a shelter where the declared margin misses the rule. Under Rule 90(8), if the option stands, but the price does not meet the Rule 89(2) circumstances, the Assessing Officer adopts the operating profit margin, interest rate or commission that the rule specifies. That is a fixed answer instead of a comparable search, and it is the reason a group should not elect at a margin its own file cannot defend.

Validity is tested separately, and it can be lost. Rule 90(2) has the Assessing Officer check that the assessee and the transaction qualify. Where the officer doubts it, Rule 90(3) requires a reference to the Transfer Pricing Officer, who may declare the option invalid after hearing the assessee. The assessee can object to the Commissioner within 15 days of that order.

The trade runs in both directions. The tolerance band and the comparability adjustment go out with the election, so the flexibility a normal determination offers, including the CBDT tolerance range for AY 2025-26, is given up. Rule 90(12) keeps the protection transaction-specific: international transactions outside the option can still be referred to the Transfer Pricing Officer under section 166.

Sections 171 and 172 apply either way. A group that loses the option, or never reaches the margin, still owes the documentation file and the Form 48 report.

Conclusion: From Policy Refinement to Practical Advantage

The IT services election now buys five years of certainty from a single filing, provided the margin sits at 15.5% or better and revenue is inside ₹2,000 crore. The decision in front of a finance head this month is whether that certainty is worth the lock-in, the loss of a tolerance band and the bar on a mutual agreement procedure for the transactions it covers.

A group between ₹300 crore and ₹2,000 crore of revenue gains most from the rewrite, since the March 2025 amendment would have left it outside the programme in most categories. A smaller group gains little from the ceiling and more from the consolidated margin, which sits well below the 17% and 18% the 1962 Rules asked of a software developer.

The file is the part that deserves an early start. The margin is a number a group can read off Rule 89(2) in an afternoon, while the file is the work of a quarter and the part an assessment tests.

Rule 89(4) fixes the threshold table for a block of three tax years from 2026-27, and the option for IT services runs five, so a group that elects now commits to a margin for years whose numbers it cannot yet see.

This note rests on the safe harbour provisions of the 2026 Rules, being Rules 86 to 102, with Rules 86 to 93 read for the sections above, on the enabling provision in section 167 of the 2025 Act, on Form No. 49 as introduced from 1 April 2026, and on Notification 21/2025 dated 25 March 2025. Research closed on 4 November 2026.

If the election is on the agenda for your group this year, I am glad to work through the margin and the file with you before the return date.