Trade
What are Incoterms 2020 and how do FOB, CIF, and DDP work for Indian exporters?
FOB, CIF, DDP explained with cost examples. How Incoterm choice affects RoDTEP calculation, insurance, and documentation.
By Aaryan Kakani · · 5 min read
What are Incoterms?
Incoterms (International Commercial Terms) are a set of 11 standardized trade rules published by the International Chamber of Commerce (ICC). The current version (Incoterms 2020) took effect on January 1, 2020, and remains the governing standard.
Each Incoterm is a three-letter code that defines exactly two things between seller and buyer:
- Cost allocation. Who pays for inland transport, export customs, freight, insurance, import duties, and last-mile delivery.
- Risk transfer point. The exact point where liability for loss or damage shifts from seller to buyer.
What do Incoterms NOT cover?
| Common Misconception | Reality |
|---|---|
| Incoterms transfer ownership/title | No. Title transfer is governed by the sales contract and applicable law, not Incoterms. |
| Incoterms define payment terms | No. Payment terms (advance, LC, DA, open account) are negotiated separately. |
| Incoterms apply automatically | No. Both parties must explicitly agree on an Incoterm and reference "Incoterms 2020" in the contract. |
| Incoterms cover breach of contract | No. Remedies for breach, force majeure, and dispute resolution are contract/law matters. |
What are the 11 Incoterms and what do they mean?
The 11 rules are grouped into four categories by the seller's increasing level of obligation. Seven work for any transport mode; four are sea/inland waterway only.
Group E. Departure
| Code | Full Name | Seller's Obligation | Risk Transfers | Mode |
|---|---|---|---|---|
| EXW | Ex Works | Make goods available at seller's premises. Minimum obligation. | At seller's premises | Any |
Group F. Main Carriage Unpaid
| Code | Full Name | Seller's Obligation | Risk Transfers | Mode |
|---|---|---|---|---|
| FCA | Free Carrier | Deliver goods to carrier at named place. Clear export customs. | At carrier's custody | Any |
| FAS | Free Alongside Ship | Deliver goods alongside the vessel at port. Clear export customs. | Alongside the vessel | Sea only |
| FOB | Free on Board | Deliver goods on board the vessel. Clear export customs. | On board the vessel | Sea only |
Group C. Main Carriage Paid
| Code | Full Name | Seller's Obligation | Risk Transfers | Mode |
|---|---|---|---|---|
| CFR | Cost and Freight | Pay freight to destination port. Export customs cleared. No insurance obligation. | On board the vessel (origin) | Sea only |
| CIF | Cost, Insurance & Freight | Pay freight + insurance (minimum ICC C cover) to destination port. | On board the vessel (origin) | Sea only |
| CPT | Carriage Paid To | Pay freight to named destination. No insurance obligation. | At first carrier | Any |
| CIP | Carriage & Insurance Paid To | Pay freight + insurance (ICC A. All-risk cover) to named destination. | At first carrier | Any |
Group D. Arrival
| Code | Full Name | Seller's Obligation | Risk Transfers | Mode |
|---|---|---|---|---|
| DAP | Delivered at Place | Deliver goods ready for unloading at destination. Buyer clears import customs. | At named destination (before unloading) | Any |
| DPU | Delivered at Place Unloaded | Deliver and unload goods at destination. Buyer clears import customs. | At named destination (after unloading) | Any |
| DDP | Delivered Duty Paid | Deliver goods cleared for import, all duties paid. Maximum obligation. | At named destination | Any |
Which Incoterms do Indian exporters use most?
Five Incoterms dominate Indian export trade: FOB, CIF, CFR, DDP, and EXW. The table below breaks down who pays what for a product worth INR 10,00,000 shipping from Mumbai to New York.
| Cost Component | EXW | FOB | CFR | CIF | DDP |
|---|---|---|---|---|---|
| Seller's quoted price (INR) | 10,00,000 | 10,45,000 | 11,95,000 | 12,05,000 | 14,00,000 |
S = Seller pays | B = Buyer pays. Amounts are illustrative for a 20-ft FCL, Mumbai to New York. Actual costs vary by product, volume, and season.
When should I use FOB?
FOB (Free on Board) is the default Incoterm for Indian sea exports. The vast majority of shipping bills from India are filed on FOB basis, and regulatory calculations are anchored to FOB value.
Seller Covers
- + Manufacturing / procurement cost
- + Inland transportation to port
- + Export customs clearance (shipping bill)
- + Port handling / terminal charges
- + Loading onto the vessel
Buyer Covers
- + Ocean/air freight
- + Marine/cargo insurance
- + Destination port handling
- + Import customs + duties
- + Last-mile delivery
How do I calculate my FOB price?
FOB Price = Ex-factory cost
+ Inland transport (factory to port)
+ Export packing charges
+ Export customs clearance fees
+ Terminal handling charges
+ Profit margin
How does FOB affect my export compliance?
| Compliance Area | FOB Relevance |
|---|---|
| Shipping bill value | Always declared as FOB value, regardless of the Incoterm used in the contract. |
| RoDTEP calculation | RoDTEP benefit = FOB value x applicable rate (%). FOB is always the base. |
| Duty drawback | Calculated on FOB value or market value cap, whichever is lower. |
| EDPMS entry value | EDPMS tracks FOB value from the shipping bill for repatriation monitoring. |
| BRC (Bank Realisation Certificate) | BRC value should match or exceed FOB value. Under-realisation triggers RBI scrutiny. |
When should I use CIF?
Under CIF (Cost, Insurance, and Freight), the seller pays for ocean freight and marine insurance in addition to delivering goods on board. Risk still transfers at the origin port. The seller pays for transit but doesn't bear transit risk.
How do I calculate my CIF price?
CIF Price = FOB Price
+ Ocean freight
+ Marine insurance (min. ICC C clause)
Example (Mumbai to New York):
FOB: INR 10,45,000
Freight: INR 1,50,000
Insurance (1% of 110% of FOB+freight): INR 13,145
CIF: INR 12,08,145
How does CIF work in practice?
| Aspect | Detail |
|---|---|
| Risk transfer | At origin port (same as FOB). Seller pays for transit but risk is buyer's once on board. |
| Insurance minimum | ICC C clause (basic cover). Covers major perils only. Buyer should purchase additional coverage if needed. |
| Insurance value | Minimum 110% of CIF value. Standard industry practice in India. |
| Import duty base | Most countries (including USA, EU) calculate import duty on CIF value, not FOB. |
| Shipping bill | Still filed at FOB value. Freight and insurance are shown separately on the bill. |
When should I choose CIF?
- First-time or less experienced buyers. They want a single all-in price covering goods, freight, and insurance. Less for them to coordinate.
- Buyer in a country with limited shipping infrastructure. If the buyer cannot easily arrange freight from India, CIF shifts the logistics burden to you.
- LC-backed transactions. Many Letters of Credit specify CIF terms. The insurance certificate is a required document under CIF LCs.
When should I use DDP?
DDP (Delivered Duty Paid) places the maximum obligation on the seller. You bear all costs from factory door to the buyer's door, including import duties and taxes at the destination. The buyer's only job is to unload the goods.
What does DDP cost for a typical shipment?
| Cost Element | Amount (INR) | Who Bears |
|---|---|---|
| DDP Price (Landed Cost) | 14,15,000 | All Seller |
What are the risks of using DDP?
1. Import duty liability
You are liable for destination country duties. US import duties range from 0% to 25%+ depending on product and HS code. Tariff changes (e.g., Section 301 duties on certain categories) can wipe out your margin overnight.
2. Destination country tax registration
DDP may trigger tax registration requirements. In the EU, you may need VAT registration as the importer of record. In the US, this is less of an issue but still complex.
3. Customs broker dependency
You need a reliable customs broker at the destination to clear goods on your behalf. A bad broker means delays, demurrage charges, or even goods stuck in customs.
4. Currency risk on duties
Import duties are payable in the destination currency. Your DDP quote in INR is exposed to exchange rate fluctuations between quoting and actual duty payment.
When does DDP make sense for my business?
- Amazon FBA shipments. You need to deliver goods cleared through customs to the Amazon warehouse. The warehouse won't handle import clearance for you. DDP or FCA with you as IOR is standard.
- D2C e-commerce. Shipping directly to end consumers via your own website. Customers expect no surprise duties on delivery.
- High-volume, stable-duty products. When you know the exact duty rate and it's unlikely to change, you can price DDP confidently.
How do Incoterms affect my export documentation?
Your Incoterm choice directly affects which documents you prepare, what values appear on them, and which compliance obligations are triggered. Here's how each Incoterm maps to key Indian export documents.
| Document / Obligation | EXW | FOB | CFR | CIF | DDP |
|---|---|---|---|---|---|
| FOB* | FOB | FOB | FOB | FOB | |
| FOB | FOB | FOB | FOB | FOB | |
| EXW price | FOB price | CFR price | CIF price | DDP price | |
| No | No | No | Yes | No** | |
| No | No | Yes | Yes | Yes | |
| ≥ FOB | ≥ FOB | ≥ FOB | ≥ FOB | ≥ FOB | |
| FOB | FOB | FOB | FOB | FOB | |
| Invoice, PL | Invoice, PL, BL | Invoice, PL, BL | Invoice, PL, BL, Ins. Cert. | Rarely LC-backed |
* EXW shipping bills still show FOB value (ex-factory + estimated inland charges). ** DDP seller arranges insurance for own risk management, not as a contractual obligation to the buyer. PL = Packing List, BL = Bill of Lading, Ins. Cert. = Insurance Certificate.
How do I choose the right Incoterm?
There is no universally "best" Incoterm. The right choice depends on your buyer type, product value, destination, and payment terms. Use the decision tables below.
Which Incoterm should I use for my buyer type?
| Buyer Profile | Recommended | Rationale |
|---|---|---|
| First-time importer | CIF / CIP | Buyer gets a single price; you handle freight and insurance. Less for an inexperienced buyer to manage. |
| Experienced trader | FOB | They have preferred freight forwarders and insurance providers. FOB gives them control and usually lower costs. |
| Amazon FBA warehouse | DDP / FCA | Amazon warehouses require import-cleared goods. You act as IOR. FCA if using a freight forwarder who handles the rest. |
| D2C end consumer | DDP | Consumers expect no surprise duties on delivery. DDP ensures a clean doorstep experience. |
| Government / institutional | CIF / CFR | Government tenders often specify CIF. They handle import clearance through their own channels. |
Which Incoterm fits my product value?
| Product Value | Recommended | Rationale |
|---|---|---|
| High value (above INR 25L) | CIF / CIP | Seller controls insurance, reducing risk of inadequate buyer coverage. Insurance costs are proportionally small. |
| Medium value (INR 5-25L) | FOB | Standard for most Indian sea exports. Good balance of control and simplicity. |
| Low value / samples (below INR 5L) | FOB / FCA | Keep it simple. Avoid DDP overhead for small shipments unless it's e-commerce D2C. |
Which Incoterm works for my destination?
| Destination | Recommended | Rationale |
|---|---|---|
| USA, EU, UK, Australia | FOB | Buyers in developed markets have mature logistics infrastructure. They prefer to control their own freight and insurance. |
| Africa, Middle East, SE Asia | CIF / CFR | Buyers in emerging markets often lack reliable freight forwarder networks. CIF simplifies procurement for them. |
| Amazon FBA (any country) | DDP / FCA | Amazon requires import-cleared delivery. You need IOR status and a destination customs broker. |
Which Incoterm matches my payment terms?
| Payment Term | Works With | Notes |
|---|---|---|
| Letter of Credit (LC) | CIF / FOB / CFR | LC specifies required documents. CIF LCs need an insurance certificate. FOB LCs are simpler with fewer docs. |
| Advance payment (TT) | Any Incoterm | Full flexibility. No documentary compliance constraints from the payment side. |
| DA/DP (Documents against Acceptance/Payment) | FOB / CIF / CFR | Buyer pays on sight of shipping documents. Incoterm should match the documents you can provide. |
| Open account | FOB / FCA | High trust required. Keep your cost exposure low with FOB. Avoid bearing freight/insurance costs when payment isn't guaranteed. |
Update history
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