When you're negotiating an international trade deal, one small three-letter code can determine who pays for shipping, who bears the risk if cargo is damaged, and who handles customs clearance. That code is an Incoterm, and understanding these terms is essential for every Indian importer and exporter.

In this comprehensive guide, we'll explain what Incoterms are, break down each of the 11 current terms, and help you choose the right ones for your business.

What are Incoterms?

Incoterms (International Commercial Terms) are a set of standardised trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities, costs, and risks between buyers and sellers in international transactions.

Think of Incoterms as a universal language for trade. When a seller in Germany and a buyer in Chennai agree on "CIF Chennai Port," both parties instantly understand:

  • Who arranges and pays for shipping
  • Who handles export and import customs
  • Who insures the cargo
  • At what point risk transfers from seller to buyer

Without this standardisation, every international contract would need pages of detailed explanations. Incoterms compress all of this into a simple, universally understood code.

A Brief History of Incoterms

The ICC first published Incoterms in 1936 to address the confusion and disputes arising from different trade practices across countries. The terms have been updated regularly to reflect changes in global trade:

  • 1936 - First edition with 6 terms
  • 1953, 1967, 1976, 1980 - Various updates
  • 1990 - Major revision for electronic documentation
  • 2000 - Simplified structure
  • 2010 - Reduced from 13 to 11 terms
  • 2020 - Current edition (effective January 1, 2020)

The Incoterms 2020 rules are the current standard and should be referenced in all new contracts.

The 11 Incoterms 2020 Explained

Incoterms are divided into four groups based on the first letter, representing increasing levels of seller responsibility:

Group E - Departure

EXW (Ex Works)

Minimum seller obligation

The seller makes goods available at their premises. The buyer handles everything else - loading, export clearance, shipping, import clearance, and delivery.

Seller's responsibilities:

  • Make goods available at their premises
  • Provide commercial invoice and documentation

Buyer's responsibilities:

  • All transportation from seller's premises
  • Export and import customs clearance
  • All costs and risks from the moment goods are made available

Best for: Buyers with strong logistics capabilities who want maximum control. Rarely used in practice because the buyer must handle export formalities in a foreign country.

Risk transfer point: Seller's premises

Group F - Main Carriage Unpaid

FCA (Free Carrier)

Most versatile F-term

The seller delivers goods to a carrier nominated by the buyer. This can be at the seller's premises (loaded onto the collecting vehicle) or at another named place (unloaded from the seller's vehicle).

Seller's responsibilities:

  • Deliver goods to the carrier at the named place
  • Export customs clearance
  • Loading (if delivery is at seller's premises)

Buyer's responsibilities:

  • Main carriage (shipping)
  • Cargo insurance (if desired)
  • Import customs clearance
  • Destination charges

Best for: Buyers who have negotiated good freight rates or want to use their preferred freight forwarder. Works for any transport mode.

Risk transfer point: When goods are delivered to the carrier

New in Incoterms 2020: FCA now allows the buyer to instruct their carrier to issue a Bill of Lading with an on-board notation to the seller - useful for Letter of Credit transactions.

FAS (Free Alongside Ship)

Sea freight only

The seller delivers goods alongside the vessel at the named port of shipment.

Seller's responsibilities:

  • Deliver goods alongside the ship
  • Export customs clearance

Buyer's responsibilities:

  • Loading onto the vessel
  • Main carriage
  • Insurance
  • Import customs clearance

Best for: Bulk cargo, heavy machinery, or situations where the buyer charters the vessel. Less common than FOB.

Risk transfer point: When goods are placed alongside the ship

FOB (Free On Board)

The most popular term for sea freight

The seller delivers goods on board the vessel at the named port of shipment. This is one of the most commonly used Incoterms, especially in Asian trade.

Seller's responsibilities:

  • Deliver goods on board the vessel
  • Export customs clearance
  • Loading costs

Buyer's responsibilities:

  • Main carriage (ocean freight)
  • Cargo insurance
  • Import customs clearance
  • Destination charges

Best for: Buyers who want to control shipping costs and use their own freight forwarder. Very common for imports into India.

Risk transfer point: When goods are on board the vessel

Common mistake: Using FOB for containerised cargo. Since containers are typically delivered to the terminal (not directly onto the ship), FCA is technically more appropriate. However, FOB remains widely used due to familiarity.

Group C - Main Carriage Paid

CFR (Cost and Freight)

Sea freight only

The seller pays for delivery to the destination port, but risk transfers when goods are loaded onto the vessel at the origin port.

Seller's responsibilities:

  • Deliver goods on board the vessel
  • Export customs clearance
  • Ocean freight to destination port

Buyer's responsibilities:

  • Cargo insurance (critical - risk transfers at loading!)
  • Import customs clearance
  • Destination port charges
  • Inland transportation

Best for: When the seller has better freight rates but the buyer wants to manage insurance.

Risk transfer point: When goods are on board the vessel at origin (not destination!)

Important: The disconnect between cost and risk is often misunderstood. The seller pays freight to the destination, but if the ship sinks, it's the buyer's loss from the moment the goods were loaded.

CIF (Cost, Insurance and Freight)

Very popular for Indian imports

Like CFR, but the seller also arranges cargo insurance. The seller pays for goods to be delivered to the destination port with insurance coverage.

Seller's responsibilities:

  • Deliver goods on board the vessel
  • Export customs clearance
  • Ocean freight to destination port
  • Cargo insurance (minimum coverage)

Buyer's responsibilities:

  • Import customs clearance
  • Destination port charges
  • Inland transportation

Best for: Buyers who want a simpler transaction with freight and basic insurance handled by the seller.

Risk transfer point: When goods are on board the vessel at origin

Insurance caveat: Incoterms 2020 requires only minimum insurance coverage (Institute Cargo Clauses C). This covers major casualties but excludes many risks. Buyers should consider purchasing additional coverage.

CPT (Carriage Paid To)

Multimodal equivalent of CFR

The seller pays for carriage to the named destination, but risk transfers when goods are handed to the first carrier.

Seller's responsibilities:

  • Deliver goods to the carrier
  • Export customs clearance
  • Freight to named destination

Buyer's responsibilities:

  • Cargo insurance
  • Import customs clearance
  • Unloading at destination (unless included in freight)

Best for: Multimodal shipments (air, road, rail, or combined) where the seller wants to arrange transportation.

Risk transfer point: When goods are delivered to the first carrier

CIP (Carriage and Insurance Paid To)

Multimodal equivalent of CIF

Like CPT, but with insurance included.

Seller's responsibilities:

  • Deliver goods to the carrier
  • Export customs clearance
  • Freight to named destination
  • Cargo insurance (comprehensive coverage)

Buyer's responsibilities:

  • Import customs clearance
  • Unloading at destination (unless included in freight)

Best for: Multimodal shipments where the buyer wants freight and insurance handled by the seller.

Risk transfer point: When goods are delivered to the first carrier

Important change in Incoterms 2020: CIP now requires comprehensive insurance (Institute Cargo Clauses A), unlike CIF which still requires only minimum coverage. This is a significant improvement for buyers.

Group D - Arrival

DAP (Delivered at Place)

Delivered but not unloaded

The seller delivers goods to a named place at destination, ready for unloading. This is increasingly popular as it gives buyers a clear landed cost.

Seller's responsibilities:

  • All transportation to named destination
  • Export customs clearance
  • Bear all risks until delivery

Buyer's responsibilities:

  • Import customs clearance
  • Unloading
  • Any duties and taxes

Best for: Buyers who want door-to-door pricing but need to handle import formalities themselves (common when only the buyer has the necessary import licenses).

Risk transfer point: When goods arrive at the named destination, ready for unloading

DPU (Delivered at Place Unloaded)

Delivered and unloaded

The seller delivers goods unloaded at the named destination. This is the only Incoterm where the seller is responsible for unloading.

Seller's responsibilities:

  • All transportation to named destination
  • Export customs clearance
  • Unloading at destination
  • Bear all risks until unloaded

Buyer's responsibilities:

  • Import customs clearance
  • Any duties and taxes

Best for: Situations where the seller has unloading capabilities or arrangements at the destination.

Risk transfer point: When goods are unloaded at the named destination

Note: DPU replaced DAT (Delivered at Terminal) in Incoterms 2020. The change allows delivery at any place, not just terminals.

DDP (Delivered Duty Paid)

Maximum seller obligation

The seller delivers goods cleared for import at the named destination. This is the opposite of EXW - the seller handles everything.

Seller's responsibilities:

  • All transportation to named destination
  • Export and import customs clearance
  • All duties, taxes, and customs charges
  • Bear all risks until delivery

Buyer's responsibilities:

  • Unloading (unless agreed otherwise)

Best for: Buyers who want a complete door-to-door price with no surprises. Common in e-commerce and when sellers have established distribution in the destination country.

Risk transfer point: When goods arrive at the named destination

Caution for sellers: DDP requires the seller to handle import clearance in a foreign country. This may require registration, licenses, or a local customs broker. Many sellers exclude certain taxes (like GST in India) by specifying "DDP exclusive of GST."

Choosing the Right Incoterm for Your Business

For Indian Importers

If you want control over shipping:

  • Use FOB or FCA - You choose the freight forwarder and shipping line
  • Benefit from your own negotiated freight rates
  • Full visibility over the shipping process

If you want simplicity:

  • Use CIF or CIP - Seller handles freight and basic insurance
  • You receive a single price for goods delivered to port
  • Easier for budgeting and planning

If you want door-to-door pricing:

  • Use DAP - Seller delivers to your warehouse
  • Clear landed cost (excluding import duties)
  • You handle customs clearance with your customs clearing agent

What most Indian importers use:

  • CIF for sea freight (approximately 60% of imports)
  • FOB when they have good freight rates
  • DAP for air freight and courier shipments

For Indian Exporters

If your buyer wants control:

  • Offer EXW or FCA - Minimum responsibility for you
  • Lower risk and simpler operations
  • Buyer handles international logistics

If you want to offer competitive delivered prices:

  • Use CIF or CFR for sea freight
  • Use CIP or CPT for air freight
  • You control the freight cost in your pricing

If you're selling to end consumers or small buyers:

  • Consider DAP or DDP - Complete service
  • Differentiates you from competitors
  • Higher margins possible on delivered sales

What most Indian exporters use:

  • FOB (buyer arranges shipping) - approximately 50%
  • CIF/CFR (seller arranges shipping) - approximately 35%
  • FCA (multimodal) - growing in popularity

Common Incoterm Mistakes to Avoid

1. Using Sea-Only Terms for Containers

FOB, CFR, CIF, and FAS are designed for goods loaded directly onto ships. For containerised cargo delivered to a terminal, FCA, CPT, and CIP are technically more appropriate since risk transfers at the terminal, not on the ship's rail.

However, FOB and CIF remain widely used for containers due to familiarity. If you use them, be aware of the technical mismatch.

2. Assuming CIF Includes Adequate Insurance

CIF only requires minimum insurance (Institute Cargo Clauses C), which covers:

  • Fire and explosion
  • Vessel sinking or stranding
  • Collision
  • General average sacrifice

It does not cover:

  • Theft
  • Damage from handling
  • Water damage (unless from specific events)
  • Many other common risks

Always verify the insurance coverage and consider purchasing additional protection.

3. Forgetting to Specify the Place

An Incoterm without a specific location is incomplete. Always specify:

  • FOB Mumbai Port (not just "FOB")
  • CIF Chennai Port (not just "CIF")
  • DAP Buyer's Warehouse, Hosur (not just "DAP")

The named place determines where costs and risks transfer.

4. Confusing Cost and Risk Transfer Points

For C-terms (CFR, CIF, CPT, CIP), the seller pays for freight to the destination, but risk transfers at the origin. This is counterintuitive and often misunderstood.

If goods are damaged during shipping under CIF terms, it's the buyer's loss even though the seller arranged and paid for shipping.

5. Using DDP Without Understanding Import Requirements

DDP requires the seller to clear goods through import customs. In India, this means:

  • Having an Import Export Code (IEC)
  • Potentially registering for GST
  • Working with a licensed customs broker
  • Paying all applicable duties and taxes

Many foreign sellers cannot or will not handle these requirements. Specify any exclusions clearly (e.g., "DDP exclusive of Indian GST").

6. Not Updating to Incoterms 2020

Always reference the current version in contracts: "CIF Chennai Port (Incoterms 2020)"

Older versions remain valid if specified, but using the current edition ensures both parties have the same understanding.

Incoterms and Your Freight Forwarder

Your freight forwarder can help you navigate Incoterms in several ways:

Quotation clarity: A good forwarder provides quotes that align with your Incoterms. If you're buying FOB, they quote origin pickup to your door. If you're buying CIF, they quote destination charges only.

Insurance advice: Forwarders can arrange cargo insurance appropriate to your terms and cargo value.

Documentation: They ensure Bills of Lading and other documents reflect the agreed Incoterms correctly.

Risk management: They advise when certain terms increase your risk and suggest alternatives.

At Trinity Freight Services, we routinely help clients understand how their chosen Incoterms affect costs and responsibilities, ensuring there are no surprises when cargo arrives.

Incoterms and Customs Clearance

Your customs clearing agent needs to know your Incoterms because they affect:

Customs value: The transaction value for duty calculation depends on the Incoterm:

  • EXW/FCA/FOB: Freight and insurance must be added to reach CIF value (the basis for Indian import duties)
  • CIF/CIP: The invoice value is typically the customs value
  • DAP/DDP: Freight must be deducted to determine FOB value for some calculations

Documentation requirements: Different terms require different supporting documents to prove the declared value.

Duty liability: Under DDP, the foreign seller may be liable for import duties, which creates complications for customs processing.

Incoterms Quick Reference Chart

Term Transport Mode Risk Transfer Seller Pays Freight? Seller Pays Insurance? Seller Clears Export? Seller Clears Import?
EXW Any Seller's premises No No No No
FCA Any To carrier No No Yes No
FAS Sea only Alongside ship No No Yes No
FOB Sea only On board ship No No Yes No
CFR Sea only On board ship Yes No Yes No
CIF Sea only On board ship Yes Yes (min) Yes No
CPT Any To carrier Yes No Yes No
CIP Any To carrier Yes Yes (full) Yes No
DAP Any At destination Yes Included in risk Yes No
DPU Any Unloaded at destination Yes Included in risk Yes No
DDP Any At destination Yes Included in risk Yes Yes

Negotiating Incoterms: Tips for Indian Businesses

Know Your Leverage

  • High-volume buyers can often negotiate better terms (move from CIF to FOB to control freight)
  • Specialised sellers may insist on certain terms (DDP for complex products with installation)
  • New relationships often start with more protective terms for each party

Consider Total Cost, Not Just Price

A lower FOB price might cost more than a higher CIF price if:

  • Your freight rates are poor
  • You lack logistics expertise
  • Delays and demurrage eat into savings

Calculate the total landed cost under different Incoterms before negotiating.

Match Terms to Your Capabilities

Don't accept EXW if you can't handle export formalities in the seller's country. Don't offer DDP if you can't manage import clearance in the buyer's country.

Document Everything

Your purchase order, proforma invoice, commercial invoice, and Bill of Lading should all show the same Incoterm and named place. Discrepancies cause disputes.

Conclusion

Incoterms are the foundation of clear international trade agreements. Understanding these 11 terms - who pays for what, who bears which risks, and where responsibilities transfer - protects your business from costly misunderstandings and disputes.

For Indian importers, mastering Incoterms helps you negotiate better deals, control costs, and avoid surprises when goods arrive. For exporters, the right Incoterms can make your offers more competitive while managing your risk appropriately.

Whether you're buying FOB to control freight costs or selling CIF to offer delivered pricing, always specify the current Incoterms edition and a precise named place in your contracts.

Trinity Freight Services helps Indian businesses navigate international trade with expert freight forwarding and customs clearance services from Chennai and Bengaluru. Whatever Incoterms you're working with, we ensure your cargo moves smoothly. Contact us to discuss your shipping needs.