IFSC Tax Exemptions Under the Income Tax Act 2025: Section 147, Section 218 and Schedule VI

The Income Tax Act, 2025 gives three kinds of relief to International Financial Services Centre (IFSC) business. Section 147 allows a 100% deduction of specified income of Offshore Banking Units (OBUs) and IFSC units. Section 218 sets a flat 15% rate on that income where it forms part of total income. Schedule VI keeps certain income of funds, non-residents and aircraft or ship leasing units out of total income altogether.

This guide explains who qualifies, for how many years, what must be filed and which conditions trip people up. Every figure is from the Act as amended by the Finance Act, 2026 (effective 1 April 2026, tax year 2026-27) and the Income-tax Rules, 2026. It is information, not tax advice.

What is the section 147 deduction for IFSC units and Offshore Banking Units?

Under section 147(1), an eligible assessee with income of the kind listed in section 147(3) gets a deduction equal to 100% of that income. Eligible assessees are:

• a scheduled bank, or a bank incorporated outside India, that has an Offshore Banking Unit in a Special Economic Zone (SEZ) (section 147(1)(a)); and
• a unit of an International Financial Services Centre (section 147(1)(b)).

"Unit" has the meaning given in section 2(zc) of the Special Economic Zones Act, 2005 (section 147(6)(b)).

Which income qualifies for the 100% deduction?

Section 147(3) lists four kinds of income:

Clause	Income
147(3)(a)	Income from an Offshore Banking Unit located in an SEZ
147(3)(b)	Business activities under section 6(1) of the Banking Regulation Act, 1949, with undertakings in an SEZ, or with entities that develop, develop and operate, or develop, operate and maintain an SEZ
147(3)(c)	Approved business activities of a unit of an IFSC set up in an SEZ
147(3)(d)	Transfer of an aircraft or a ship leased by a unit referred to in (c), if that unit commenced business operations by 31 March 2030

For how many years can the deduction be claimed?

Section 147(2), as substituted by the Finance Act, 2026 from 1 April 2026, sets the period. It applies irrespective of anything in section 80LA of the Income-tax Act, 1961.

• Banks with an OBU (section 147(1)(a)): twenty consecutive tax years beginning from the "relevant tax year". Where the first ten years of deduction under section 80LA(1) of the 1961 Act ended on 31 March 2025, a further ten consecutive years are allowed from the tax year beginning 1 April 2026.
• IFSC units (section 147(1)(b)): twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the option of the assessee. Before the amendment this was ten years out of fifteen.

The "relevant tax year" is the tax year in which the permission, registration or approval was obtained: permission under section 23(1)(a) of the Banking Regulation Act, 1949, or registration under the SEBI Act, 1992 or another relevant law for an OBU; and, for an IFSC unit, also registration under the International Financial Services Centres Authority Act, 2019 (section 147(6)(a)).

What is the tax rate under section 218?

Section 218 applies where the total income of an assessee includes income of the nature referred to in section 147(3). Tax is computed in two parts:

Sl. No.	Income	Rate
1	Income referred to in section 147(3)	15%
2	Total income as reduced by the income in Sl. No. 1	Rates in force

Read the two sections together: section 147 removes the income through a deduction while the deduction is available, and section 218 states the rate for that income when it sits inside total income. The Act text does not spell out a step-by-step order, so a CA should confirm the position for each client before computing.

What income does Schedule VI keep out of total income?

Schedule VI (read with section 11) lists income that is not included in total income of eligible persons in an IFSC, subject to the conditions in column D. In brief:

Sl. No.	Income	Who	Key condition
1 to 4	Transfer of specified capital assets on an IFSC recognised stock exchange; transfer of securities (other than shares in an Indian-resident company); income from securities issued by a non-resident; business income from a securitisation trust	Specified fund	Limited to income attributable to units held by non-residents or the investment division of an OBU; computed as prescribed. Sl. No. 1 also needs consideration in convertible foreign exchange; Sl. No. 3 needs the income not to accrue or arise in India otherwise
5	Transfer of non-deliverable forward contracts, offshore derivative instruments or OTC derivatives, and distributions on them	Non-resident	Contract is with an IFSC OBU or a Foreign Portfolio Investor unit of an IFSC; prescribed conditions met
6	Royalty or interest on lease of an aircraft or ship	Non-resident	Paid by an IFSC unit that commenced operations on or before 31 March 2030
7	Income from a portfolio managed by a portfolio manager, or a notified activity	Non-resident	Received in an account with an IFSC OBU; only to the extent it arises outside India and is not deemed to arise in India
8	Capital gains on transfer of equity shares of a domestic company that is an IFSC unit leasing aircraft or ships	Non-resident or an IFSC aircraft or ship leasing unit	Company began operations on or before 31 March 2030; exemption available for ten tax years as set out in column D
9	Income from a specified fund, or on transfer of units in it	Unit holder of a specified fund	Nil
10	Capital gains on transfer of shares of an Indian-resident company on fund relocation	Non-resident or specified fund	Shares moved from the original fund to the resultant fund in relocation; limited to units held by non-residents
11	Dividends from an IFSC unit leasing aircraft or ships	An IFSC unit	Paying unit is primarily engaged in aircraft or ship leasing
12	Interest payable	Non-resident	Payable by an IFSC unit on money borrowed on or after 1 September 2019

The Notes under the Schedule define "specified fund", "convertible foreign exchange", "securitisation trust" and the other terms. For a specified fund set up as a trust, company, LLP or body corporate in an IFSC, all units except those held by a sponsor or manager must be held by non-residents. Resident holders are tolerated only where a non-resident later becomes resident and the resident holding stays within 5% of total units issued, with other prescribed conditions (Note 1(g)(i)(C), as substituted by the Finance Act, 2026).

What must you file to claim the section 147 deduction?

Section 147(4) allows the deduction only if the assessee submits along with the return of income:

1. a report from an accountant certifying the correctness of the claim, in Form No. 35 (rule 69, which cites section 147(4)(a) and section 515(3)(b) for who counts as an accountant); and
2. a copy of the permission under section 23(1)(a) of the Banking Regulation Act, 1949, or the permission or registration under the International Financial Services Centres Authority Act, 2019.

What changed from 1 April 2026?

• The deduction period for IFSC units went from ten years out of fifteen to twenty years out of twenty-five, and for OBU banks from ten to twenty consecutive years (section 147(2)).
• Under section 147(5), for an OBU or other unit commencing operations on or after 1 April 2026, the deduction is available only if the unit is not formed by splitting up, reconstruction, reorganisation or transfer of a business already in existence in India.
• In Schedule VI, the commencement cut-off for the investment division of an OBU registered as a Category-I foreign portfolio investor moved from 2025 to 31 March 2030 (Note 1(g)(ii)(A)), and the resident-holding allowance in the specified fund test (Note 1(g)(i)(C)) is now tested on the number of units, within 5% of total units issued.

Worked examples

Example 1: IFSC unit claiming section 147 (tax year 2026-27)

Assumptions: Meena's IFSC unit earns Rs 8,00,000 of approved business income of the kind in section 147(3)(c) and Rs 1,00,000 of other income. It has exercised the option to claim the deduction in 2026-27, is within its 20-of-25-year window, and has filed Form No. 35 and the permission copy with the return.

Step	Amount (Rs)
Income under section 147(3)(c)	8,00,000
Deduction under section 147(1) at 100%	(8,00,000)
Balance of that income	0
Other income, taxed at the rates in force	1,00,000

Example 2: section 218 at 15% (tax year 2026-27)

Assumptions: an assessee's total income includes Rs 10,00,000 of income referred to in section 147(3), and Rs 4,00,000 of other income. For this illustration the 147(3) income is part of total income. Surcharge and cess are ignored.

Step	Working	Amount (Rs)
Tax on Sl. No. 1 income	15% of 10,00,000	1,50,000
Remaining total income	14,00,000 less 10,00,000	4,00,000
Tax on Sl. No. 2 income	Rates in force on 4,00,000	As per rates
Aggregate tax	1,50,000 plus tax on 4,00,000

Example 3: Ravi, a non-resident lessor

Ravi lives abroad and leases an aircraft to an IFSC unit that began operations in 2027. The unit pays him lease royalty. Under Schedule VI, Sl. No. 6, this royalty is left out of Ravi's total income because he is a non-resident, the payer is an IFSC unit and it commenced operations on or before 31 March 2030. If the unit had commenced operations in 2031, the entry would not apply.

Example 4: a bank splitting its business

A scheduled bank in India moves an existing lending business into a new OBU that starts on 1 July 2026 and expects the section 147 deduction on it. Because the unit starts after 1 April 2026 and is formed by transferring a business already in existence in India, section 147(5) denies the deduction.

Does an IFSC unit need to file Form 145 for foreign remittances?

Rule 220 requires a person paying a non-resident (not a company) or a foreign company to furnish information in Form No. 145. Rule 220(3)(b) says no information is required for a sum not chargeable under the Act where the remittance is made by an IFSC unit referred to in section 147(1)(b). Sums that are chargeable still follow rule 220(1).

Common mistakes

• Claiming the deduction without Form No. 35 and the permission or registration copy filed with the return (section 147(4)).
• Assuming a ten-year window. Since 1 April 2026 the OBU period is twenty consecutive years and the IFSC unit period is twenty out of twenty-five years.
• Counting the years from the wrong date. The clock starts in the tax year the permission or registration was obtained, not when business starts earning.
• Setting up a new unit by moving an existing Indian business into it after 31 March 2026 (section 147(5)).
• Applying Schedule VI entries without checking the 31 March 2030 commencement cut-off or the convertible foreign exchange condition.

Quick reference

Item	Provision	Figure
Deduction	Section 147(1)	100% of qualifying income
OBU period	Section 147(2)(a)	20 consecutive tax years
IFSC unit period	Section 147(2)(b)	20 years out of 25, at option
Aircraft or ship lease cut-off	Section 147(3)(d); Schedule VI Sl. Nos. 6, 8	Commenced by 31 March 2030
Rate on 147(3) income	Section 218, Sl. No. 1	15%
Accountant report	Section 147(4)(a); rule 69	Form No. 35
Foreign remittance information	Rule 220	Form No. 145

Where this is in the Act

• Section 147: deduction for OBUs and IFSC units, conditions and definitions
• Section 218: 15% rate on income referred to in section 147(3)
• Section 11 and Schedule VI: income not included in total income
• Rule 69: Form No. 35 accountant report
• Rule 220: Form No. 145 for payments to non-residents

Tracking which clients have an IFSC unit, when each deduction window opens and closes, and when the Form No. 35 report is due is mostly a calendar problem. Finexo's practice management software for CAs keeps those deadlines and client-wise tasks in one place. It does not compute tax or file returns for you.