Paragraphs 5 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.
Paragraph 5.04 lists thirteen conditions on how an EPCG export obligation is met: whose goods count, what else counts, the average export obligation and the one-benefit rule. Paragraph 5.08 says how the obligation is reckoned for direct imports and for domestic purchases. The Handbook (paragraphs 5.10 to 5.12) covers third-party exports, realisation of proceeds and the average calculation.
This article is based on the chapter-wise text of the Foreign Trade Policy, 2023 published on the DGFT website, as consulted on 2 October 2026; the copy carries no "updated up to" date. The procedure is taken from Chapter 5 of the Handbook of Procedures, 2023 as published on the DGFT website (file of July 2026), consulted on 2 October 2026. Later Notifications and Public Notices should be checked. If a dispute over an obligation looks likely, our legal consultation team can review the paperwork.
Paragraph 5.01(b) of the Policy sets the obligation at 6 times the duties, taxes and cess saved in 6 years. Paragraph 5.04(c) adds an average export obligation (AEO) over the arithmetic mean of the preceding three licensing years for the same and similar products. For indigenous sourcing, specific obligation is 25% less (paragraph 5.04(d)). Only one of the reduced-obligation benefits in paragraphs 5.04(d), 5.09, 5.10 and 5.11 is admissible (paragraph 5.04(l)).
What the Policy says in paragraph 5.04
| Sub-paragraph | Rule |
|---|---|
| (a) | The obligation is fulfilled by exporting goods manufactured by the holder or the supporting manufacturer, or services rendered by the holder, for which the authorisation was granted. |
| (b) | Goods may be exported directly or through third party(ies). |
| (c) | The obligation is over and above the average level of exports achieved in the preceding three licensing years for the same and similar products, within the overall export obligation period including any extended period, except for categories in paragraph 5.12(a). The average is the arithmetic mean of export performance in the preceding three licensing years. The AEO is to be fulfilled every financial year until the obligation is completed. Only exports or supplies over and above the AEO count towards the obligation. |
| (d) | For indigenous sourcing of capital goods, specific EO is 25% less than the EO under paragraph 5.01. The average EO under paragraph 5.04(c) does not change. |
| (e) | Exports under Advance Authorisation, DFIA, Duty Drawback, RoSCTL and RoDTEP are also eligible for fulfilling the obligation under EPCG. |
| (f) | Both physical exports and deemed exports may fulfil the obligation. Deemed export supplies are also eligible for the benefits in paragraph 7.03 of the Policy. |
| (g) | Exports made from DTA units alone are counted for calculating or fulfilling the AEO or the EO. |
| (h) | The obligation can also be fulfilled by supplying ITA-I items to the DTA, provided realisation is in foreign exchange. |
| (i) | Royalty payments received by the holder in convertible foreign currency, and foreign exchange received for R&D services, also count. |
| (j) | Payment received in rupee terms for services notified in Appendix 5D counts towards discharge. |
| (k) | Export proceeds realised in Indian Rupees as per paragraph 2.52(d)(ii) also count. |
| (l) | Only one benefit specified in paragraphs 5.04(d), 5.09, 5.10 and 5.11 is admissible. |
| (m) | Extension of the EO period is permitted as prescribed in the Handbook of Procedures. |
Paragraph 5.04(k) cites paragraph 2.52(d)(ii). Paragraphs 2.52 and 2.53 were substituted on 20 August 2026 by Notification 30/2026-27; see our article on paragraphs 2.52 and 2.53. The sub-paragraph is given here as the chapter file prints it, and this article does not say what the new text allows.
Paragraph 5.04(f) says deemed export supplies are eligible for the benefits of paragraph 7.03; those benefits are explained in our article on paragraphs 7.03 to 7.06 and 7.08.
Paragraph 5.08: reckoning the obligation
In the case of direct imports, the EO is reckoned with reference to the actual duty, taxes and cess saved. In the case of domestic sourcing, it is reckoned with reference to the notional Customs duty, taxes and cess saved on the FOR value indicated in the Advance Release Order (ARO) or Invalidation Letter. How domestic sourcing works is in our article on paragraph 5.07.
Procedure under the Handbook
Paragraph 5.10 (conditions in addition to paragraph 5.04 of the Policy).
- (a) The names of the supporting manufacturer and the exporter appear on the export documents.
- (b) If the holder exports through a third party, shipping bills or bills of export show both the holder and the supporting manufacturer (if any) with the EPCG authorisation number. The shipping bill, GST invoice and e-BRC or export realisation from the RBI's EDPMS are in the name of the third-party exporter. The goods must be manufactured by the holder or the supporting manufacturer where the imported capital goods are installed, and are exported as they are by the ultimate exporter without further processing. Only proceeds realised through the normal banking channel from the third party's account to the holder's account count.
- (c) A disclaimer certificate from the third party that it will not use such proceeds to fulfil the obligation of any EPCG authorisation it holds.
- (d) For discharge through third-party exporters the holder submits extra documents: proof of dispatch from the holder's factory to the ultimate exporter or the port (an ARE-1 certificate or tax invoice for export under GST with Customs authentication, or, for a unit not registered with Central Excise or GST, an invoice showing the authorisation number and date); a Lorry Receipt or logistics evidence; an undertaking on stamp paper from the third party that the exported products were manufactured by the licence holder; financial evidence of receipt of proceeds through the normal banking channel; and the third party's disclaimer certificate.
Paragraph 5.11 (realisation of export proceeds). Proceeds are realised in convertible foreign currency, or in Indian Rupees as per paragraph 2.53 of the Policy, except for deemed export supplies under Chapter 7. Exports to SEZ units and supplies to developers or co-developers count irrespective of the currency of realisation, and realisation for supplies to SEZ units is from the SEZ unit's foreign currency account. Paragraph 2.53 was substituted on 20 August 2026 (Notification 30/2026-27); the line is quoted as the Handbook file prints it. For the FEMA side of realisation, see Export Realisation Under FEMA Section 7.
Paragraph 5.12 (calculation of the AEO). Exports counted, or being counted, for fulfilling the specific EO against EPCG Authorisations within a valid EO period (original or extended), made in the preceding 3 years, are not taken into account while calculating the AEO.
Example with invented names
Orchid Garments Pvt Ltd holds an EPCG Authorisation and sources part of its machinery from a domestic manufacturer against an Advance Release Order. Under paragraph 5.04(d) its specific EO for that sourcing is 25% less than the EO under paragraph 5.01, while the AEO of paragraph 5.04(c) is unchanged. It exports finished shirts through Sea Breeze Traders, a third-party exporter. Paragraph 5.10 of the Handbook requires the shipping bill to carry both names and the authorisation number, the goods to be exported as they are, and the sale proceeds to move by normal banking channel from Sea Breeze's account to Orchid's. Sea Breeze also gives the disclaimer certificate and the stamp-paper undertaking. Only the part of the supplies above the AEO counts towards the obligation.
Cross-references
For the scheme's design and the six-times rule, see our article on paragraphs 5.00 and 5.01. Extension of the obligation period is in the Handbook paragraphs 5.15, 5.16 and 5.19. The Policy rests on section 5 of the Foreign Trade (Development and Regulation) Act, 1992; the Handbook on section 6. The Policy is not a statute; it binds through the Act and the conditions of each authorisation.
Need help with export obligation questions?
If you are not sure whether a shipment, a third-party arrangement or a rupee receipt counts, an early review is cheaper than a later dispute. Our legal consultation service can look at the authorisation, the shipping bills and the realisation trail together.
Key takeaways
- Paragraph 5.04(c): AEO is the arithmetic mean of the preceding three licensing years; only exports above it count.
- Paragraph 5.04(d): 25% less specific EO for indigenous sourcing; AEO unchanged.
- Paragraph 5.04(l): only one reduced-obligation benefit among paragraphs 5.04(d), 5.09, 5.10 and 5.11.
- Paragraph 5.08: actual duty saved for direct imports; notional on FOR value for domestic sourcing.
- Handbook paragraph 5.10: third-party exports need both names, normal banking channel proceeds, disclaimer and undertaking.
- Paragraphs 5.04(k) and 5.11 of the Handbook cite paragraphs 2.52 and 2.53, which were substituted on 20 August 2026.
Read next
- Paragraphs 5.00 and 5.01 of the Foreign Trade Policy, 2023: the EPCG Scheme
- Paragraph 5.07 of the Foreign Trade Policy, 2023: indigenous sourcing of capital goods under EPCG
- Paragraphs 5.09 to 5.12 of the Foreign Trade Policy, 2023: reduced EPCG export obligation
- EPCG Scheme: Six Times Duty Saved, and the Average Export Obligation
Disclaimer: Based on the chapter-wise text of the Foreign Trade Policy, 2023 and the Handbook of Procedures, 2023 published on the DGFT website, and on the later Notifications named in this article, as consulted on 2 October 2026. The copies carry no "updated up to" date. Notifications, Public Notices, Trade Notices, the ITC(HS) schedules, Appendices and forms change often; the current text on the DGFT website should be checked before acting. This article is general information, not legal advice; check the official text before acting.