Incoterms 2020 Explained: What Every Indian Exporter Must Know

What are Incoterms?

Incoterms (International Commercial Terms) are a set of globally recognized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade. They specify who pays for what, who bears the risk at each stage, and where the transfer of responsibility occurs.

The current version, Incoterms 2020, came into effect on January 1, 2020, and contains 11 terms divided into four groups. Every international trade contract should specify which Incoterm applies, as it directly affects pricing, risk, and logistics responsibilities.

Why Incoterms Matter

• Cost clarity: They define exactly who pays for freight, insurance, customs, and handling
• Risk allocation: They specify the exact point where risk transfers from seller to buyer
• Legal protection: They provide a standardized framework recognized worldwide
• Pricing accuracy: They help you calculate the true cost of goods
• Dispute prevention: Clear terms prevent misunderstandings between trading partners

The 11 Incoterms 2020

Group E - Departure

EXW (Ex Works)

The seller makes goods available at their premises. The buyer bears all costs and risks from that point.

• Seller's responsibility: Make goods available at their factory/warehouse
• Buyer's responsibility: Everything else - pickup, export clearance, freight, import clearance, delivery
• Risk transfers: At seller's premises
• Best for: Experienced buyers who want maximum control
• Common pitfall: Buyer must handle export clearance in seller's country, which can be complicated

Group F - Main Carriage Unpaid by Seller

FCA (Free Carrier)

The seller delivers goods to a carrier or named place chosen by the buyer. This is the most versatile Incoterm.

• Seller's responsibility: Deliver goods to carrier, export clearance
• Buyer's responsibility: Main freight, import clearance, delivery
• Risk transfers: When goods are handed to the carrier
• Best for: Most transactions. Recommended replacement for both EXW and FOB in many situations
• New in 2020: Buyer can instruct carrier to issue an on-board Bill of Lading to the seller

FAS (Free Alongside Ship)

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

• Seller's responsibility: Deliver goods alongside vessel, export clearance
• Buyer's responsibility: Loading onto vessel, freight, insurance, import clearance
• Risk transfers: When goods are placed alongside the vessel
• Best for: Bulk cargo, commodities
• Limitation: Only for sea/inland waterway transport

FOB (Free on Board)

The most popular Incoterm for sea freight. The seller loads goods onto the vessel at the named port.

• Seller's responsibility: Deliver goods on board the vessel, export clearance
• Buyer's responsibility: Freight from loading port, insurance, import clearance
• Risk transfers: When goods are on board the vessel
• Best for: Sea freight where buyer wants to control shipping costs
• Most used in India: Majority of Indian exports are quoted on FOB basis

Group C - Main Carriage Paid by Seller

CFR (Cost and Freight)

The seller pays freight to the destination port but risk transfers at the loading port.

• Seller's responsibility: Freight to destination port, export clearance
• Buyer's responsibility: Insurance, import clearance, delivery from port
• Risk transfers: When goods are on board at origin port (not destination!)
• Important: Seller pays freight but does not bear risk during voyage
• Best for: When seller has better freight rates

CIF (Cost, Insurance, and Freight)

Like CFR but seller also arranges insurance. Very common for imports into India.

• Seller's responsibility: Freight + insurance to destination port, export clearance
• Buyer's responsibility: Import clearance, delivery from port
• Risk transfers: When goods are on board at origin port
• Insurance requirement: Minimum Institute Cargo Clause C (basic coverage)
• Best for: Buyers who want a simple all-inclusive price
• Note: Insurance coverage is minimum. Buyer may want additional coverage

CPT (Carriage Paid To)

Like CFR but for any transport mode (not just sea). Seller pays freight to named destination.

• Seller's responsibility: Freight to destination, export clearance
• Buyer's responsibility: Insurance, import clearance, final delivery
• Risk transfers: When goods are handed to the first carrier
• Best for: Multimodal transport, air freight

CIP (Carriage and Insurance Paid To)

Like CIF but for any transport mode. Seller pays freight and insurance.

• Seller's responsibility: Freight + insurance to destination, export clearance
• Buyer's responsibility: Import clearance, final delivery
• Risk transfers: When goods are handed to the first carrier
• New in 2020: Insurance must be Institute Cargo Clause A (all-risk coverage) - higher than CIF
• Best for: High-value goods shipped by any mode

Group D - Arrival

DAP (Delivered at Place)

Seller delivers goods to the named destination, ready for unloading. Buyer handles import clearance.

• Seller's responsibility: All costs and risks to destination (excluding import duties)
• Buyer's responsibility: Import clearance, duties, unloading
• Risk transfers: At the named destination
• Best for: When seller wants to provide door-to-door service but cannot handle import clearance

DPU (Delivered at Place Unloaded)

Previously called DAT. Seller delivers AND unloads goods at the named destination.

• Seller's responsibility: All costs and risks to destination including unloading
• Buyer's responsibility: Import clearance and duties
• Risk transfers: After unloading at destination
• Best for: Terminal/port deliveries where seller arranges unloading
• Note: The only Incoterm where seller is responsible for unloading

DDP (Delivered Duty Paid)

Maximum seller responsibility. Seller handles everything including import clearance and duties.

• Seller's responsibility: Everything - freight, insurance, import clearance, duties, delivery
• Buyer's responsibility: Only receiving the goods
• Risk transfers: At buyer's premises/named destination
• Best for: E-commerce, when seller wants complete control, new buyers unfamiliar with import procedures
• Caution: Seller must be able to handle import clearance in buyer's country

Incoterms Most Used in Indian Trade

For Indian Exports

1. 1FOB - Most common. Indian exporters quote FOB price, buyer arranges shipping
2. 2CIF - When buyer wants all-inclusive pricing to their port
3. 3EXW - When buyer has their own freight forwarder in India

For Indian Imports

1. 1CIF - Most common for imports. Supplier handles shipping and insurance
2. 2FOB - When Indian importer wants to control shipping costs (recommended)
3. 3EXW - When buying from China via platforms like Alibaba (buyer handles everything)

How Incoterms Affect Your Costs

Choosing the right Incoterm significantly impacts your total landed cost:

Example: Importing goods worth $10,000 from China

The cheapest Incoterm depends on who gets better freight rates and how much the seller marks up logistics costs.

How to Choose the Right Incoterm

• New to international trade? Start with CIF for imports and FOB for exports
• Want cost control? Use FOB/FCA and choose your own freight forwarder
• Maximum simplicity? Use CIF for imports and DDP for exports
• Regular high-volume trader? FOB/FCA gives you the most flexibility and control
• Selling on e-commerce platforms? DDP provides the best buyer experience

Common Incoterm Mistakes

1. 1Using FOB for air freight (FOB is technically only for sea freight; use FCA instead)
2. 2Assuming CIF insurance is comprehensive (it is only minimum coverage)
3. 3Not specifying the exact named place (e.g., "FOB Shanghai" not just "FOB")
4. 4Confusing risk transfer point with cost responsibility point in C-terms
5. 5Using EXW when you cannot handle export clearance in the seller's country

Conclusion

Incoterms are fundamental to international trade. Choosing the right Incoterm can save you significant costs and reduce risks. When in doubt, consult your freight forwarder - they deal with these terms daily and can advise the best option for your specific situation.

Need help understanding which Incoterm works best for your shipments? Contact Universe Logistic Solution for expert guidance on international trade terms and logistics planning.