The funds, accumulated over years of oil trade through a special rupee payment mechanism, have become a flashpoint as Tehran presses for the release of more than $100 billion in frozen assets worldwide amid ceasefire talks with Washington.

The money dates back to a workaround devised in 2012, when US and European sanctions cut Iran off from the global dollar-based payment system. Under the arrangement, Indian oil companies deposited rupee payments for Iranian crude into accounts at state-run UCO Bank in Kolkata, which was chosen because it had no exposure to the US financial system.

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Iran was meant to use those rupees to purchase Indian goods such as rice, medicines and machinery -- effectively a barter system dressed in banking terms.

At its peak around 2018-19, the Iranian funds in UCO Bank exceeded 60,000 crore rupees. But India's oil imports from Iran fell to zero after May 2019, when Washington declined to renew sanctions waivers. With trade volumes collapsing, the mechanism for drawing down those rupee balances stalled, and the funds have remained largely inaccessible to Tehran.

Frozen assets at heart of diplomacy

Iran's frozen assets globally -- estimated between $80 billion and $120 billion -- have emerged as a central demand in the current US-Iran negotiations.

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During ceasefire talks in Islamabad on 11 April, a senior Iranian source told Reuters that Washington had agreed to unfreeze $6 billion held in Qatar, a claim the White House promptly denied, with a US official calling it "false".

Iranian media reports that the country's frozen holdings include around $20 billion in China, $6 billion in Iraq, $7 billion in India, $6 billion in Qatar and $1.5 billion in Japan.

Iran's parliament speaker, Mohammad Bagher Ghalibaf, said on X ahead of the Islamabad talks that the release of frozen assets was a prerequisite for negotiations to begin.

India's delicate balancing act

India has cautiously re-engaged with Iranian oil in recent weeks after Washington issued a 30-day sanctions waiver around 20 March for Iranian crude already at sea.

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Indian Oil Corporation secured a shipment -- the first Iranian crude to reach India in over seven years. Government sources confirmed that payments are being settled largely in rupees through vostro accounts, with some transactions routed via third countries.

However, the US Treasury announced on Wednesday that the temporary waiver will not be renewed, signalling a return to stricter enforcement. India's 2026-27 Union Budget also made no allocation for Iran's Chabahar Port project for the first time, reflecting New Delhi's caution under renewed sanctions pressure.