The Central Board of Direct Taxes (CBDT) has notified that no tax deduction at source (TDS) will be required on certain payments made to eligible IFSC units. The notification has been issued under Section 147 read with Section 400(1) of the Income Tax Act, 2025 and comes into force retrospectively from April 1, 2026.
The notification, published in the Official Gazette on July 10, 2026, specifies various categories of IFSC entities and the payments that will qualify for the TDS exemption. The move is aimed at strengthening India's IFSC ecosystem and enhancing the ease of doing business for financial institutions operating from these centres.
Which IFSC Units Are Covered?
The exemption applies to several categories of IFSC units, including:
- Banking Units
- Finance Companies
- Finance Units
- Fund Management Entities
- Broker Dealers
- Investment Advisers
- Registered Distributors
- Custodians
- Credit Rating Agencies
- Investment Bankers
- Debenture Trustees
- IFSC Insurance Intermediary Offices
- International Trade Finance Service (ITFS) Units
- FinTech Entities
Payments Eligible for TDS Exemption
The notification covers a wide range of income streams earned by eligible IFSC units, such as:
- Interest income on External Commercial Borrowings (ECBs) and loans
- Professional fees
- Technical fees
- Investment advisory fees
- Distribution and commission income
- Referral fees
- Brokerage income
- Credit rating fees
- Trusteeship fees
- Insurance commission
- Dividend income received by specified IFSC entities
- Commission income from factoring and forfaiting services
Conditions for Availing the Benefit
The relief is not automatic. To claim the exemption, the IFSC unit receiving the payment must furnish a Statement-cum-Declaration in Form No. 1(N) to the payer. The declaration must specify the twenty consecutive tax years for which the unit opts to claim deduction under Section 147 of the Income Tax Act, 2025.
Once the payer receives the declaration, it can make eligible payments without deducting TDS. However, the payer will still be required to report such payments in the prescribed TDS statements under the Income-tax Rules, 2026.
Twenty-Year Tax Benefit Window
A notable feature of the notification is that the exemption is linked to the twenty consecutive tax years chosen by the IFSC unit for claiming the deduction available under Section 147. The TDS relaxation will remain available only during this selected period. For any year outside the opted period, normal TDS provisions will apply.
New Form 1(N) Introduced
CBDT has also introduced Form No. 1(N) for IFSC units. The form requires details such as:
- Name and PAN of the IFSC unit
- Registration or permission details
- Relevant authority granting approval
- Tax years for which deduction is being claimed
- Declaration regarding eligibility under Section 147
The form must be verified and signed by an authorized person competent to sign the income-tax return of the entity.
Effective From April 1, 2026
Although the notification was issued on July 10, 2026, it has been given retrospective effect from April 1, 2026. CBDT has clarified that no person is adversely affected by the retrospective operation of the notification.
The notification is expected to reduce compliance burdens for IFSC entities and further strengthen India's position as a global financial services hub by providing greater tax certainty and operational ease for eligible financial institutions.
Click here to view/download the official copy of the notification
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