Loan or equity?
- Loans can be repaid without a capital reduction, and interest may be deductible for the borrower.
- Equity is simpler to put in and strengthens the balance sheet, but getting money back out means dividends or buybacks.
- Each direction has its own FEMA framework, withholding tax and transfer-pricing requirements — so compare both before remitting.
US parent lending to its Indian subsidiary: ECB
A loan from a foreign parent to an Indian company is an External Commercial Borrowing (ECB). The Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, in force from 16 February 2026, replaced the older master direction with a more principle-based framework:
- Eligible borrowers broadly include resident entities (not individuals) incorporated under Indian law, including LLPs.
- Limit: ECBs up to the higher of USD 1 billion or 300% of net worth under the revised framework.
- Maturity: a minimum average maturity of three years, with shorter periods permitted in specified cases.
- Pricing: the old all-in-cost ceiling has gone; pricing must reflect market conditions, and loans from related-party lenders must be at arm’s length.
- Reporting: a Loan Registration Number is obtained through the AD bank before drawdown, and Form ECB-2 is now event-based — filed within seven days after the end of the month in which a drawdown or repayment occurs.
- End-use restrictions still apply to certain purposes — check the regulations for the specific use of funds.
The alternative is equity (or convertible instruments), reported under FDI rules — see FC-GPR.
Indian parent lending to its US subsidiary: ODI loan
- An Indian company can lend to a foreign entity in which it has made ODI (equity), under the Overseas Investment Rules, 2022.
- The loan counts towards the financial commitment limit — 400% of net worth under the automatic route. See US subsidiary of an Indian company.
- It must be documented in a loan agreement, priced at arm’s length, and reported through the AD bank; interest and principal due must be repatriated on time.
- Resident individuals face tighter rules on lending to foreign entities — take advice before a founder lends personally to the US company.
Interest: withholding and the treaty
| Direction | Withholding on interest |
|---|---|
| Indian subsidiary pays interest to US parent | Indian withholding applies; the India–US treaty caps source-country tax on interest at 15% (10% for banks and similar lenders), subject to documentation such as a TRC and Form 10F |
| US subsidiary pays interest to Indian parent | US withholding of 30% by default, reduced by the treaty to 15% (10% for qualifying financial institutions) with a W-8BEN-E; the US “portfolio interest” exemption generally doesn’t apply to a 10%-plus shareholder |
The recipient generally claims a foreign tax credit at home. Rates and credit mechanics: India–US DTAA.
Interest deduction limits
- India: interest paid to an associated enterprise abroad is subject to India’s thin-capitalisation rule, which limits the deduction for such interest (broadly to 30% of EBITDA above a threshold), with carry-forward of the excess. From 1 April 2026 check the corresponding provision of the Income-tax Act, 2025.
- US: the business interest limitation generally caps net interest deductions at a percentage of adjusted taxable income, with an exception for smaller taxpayers under the gross-receipts test.
Pricing and paperwork
- Written loan agreement — amount, currency, interest, tenor, repayment and security.
- Arm’s-length interest rate benchmarked for the borrower’s credit profile — see transfer pricing.
- FEMA registration and reporting before and after drawdown (ECB) or through ODI reporting.
- Withholding, Form 1042-S (for US payers) and remittance documentation (for Indian payers) on each interest payment.
- Matching entries in both companies’ books — see US bookkeeping and consolidation.
Running an Indian subsidiary for a foreign parent? See Indian subsidiary compliance and repatriating profits from India.
Frequently asked questions
Can a US parent lend money to its Indian subsidiary?
Yes, as an External Commercial Borrowing under FEMA. Under the amendment effective 16 February 2026, borrowing limits, maturity and pricing norms were liberalised; related-party loans must be at arm's length and the loan is registered and reported through the AD bank.
What is the ECB limit after the 2026 amendment?
Under the revised framework, eligible borrowers can raise ECBs up to the higher of USD 1 billion or 300% of net worth, subject to the regulations.
Can an Indian company lend to its US subsidiary?
Yes, where it has made overseas direct investment in the subsidiary. The loan counts toward the financial commitment limit (400% of net worth under the automatic route), must be at arm's length and is reported through the AD bank.
What withholding tax applies to interest between India and the US?
The India–US treaty generally caps source-country tax on interest at 15%, or 10% for banks and similar financial institutions; the US default rate without treaty documentation is 30%.
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.