The rule in section 218
Section 218 was substituted by the Finance Act, 2026 under the heading "Tax on business income of Offshore Banking Units or International Financial Services Centre unit". Where an assessee's total income includes income of the kind referred to in section 147(3), its tax is the total of:
| Income | Rate |
|---|---|
| Income referred to in section 147(3) | 15% |
| Total income as reduced by that income | Rates in force |
In a year the unit has chosen for the section 147 deduction, the eligible income is deducted in full and so does not reach total income. Section 218 therefore matters in the other years: the years after the 20-year window ends, and any years inside the 25-year block that the unit has not chosen.
The second line of the table covers everything else: income outside the unit's approved activities, other income of the same assessee, and, on our reading of section 147(3) read with Form No. 35, income not received in convertible foreign exchange. These are taxed at ordinary rates.
Choosing the 20-year window
For an IFSC unit, the 20 years are any 20 consecutive tax years out of 25 beginning with the relevant tax year (section 147(2)(b)). Choosing them involves trade-offs:
- Early years. A unit that expects little profit in its first years may consider starting the window later. Any eligible profit it does earn in those early years is then taxed at 15% under section 218.
- Withholding. Relief from tax deduction at source under Notifications 80/2026 and 75/2026 lasts only for the 20 years declared in Form No. 1(N). In any other year, payers must deduct. The years declared to payers should match the years claimed in the return.
- Minimum tax. In both deduction and non-deduction years, a company may pay minimum alternate tax and a non-corporate unit may pay alternate minimum tax. Model the 25 years with those provisions in, not out. See Minimum alternate tax for IFSC units.
- Offshore Banking Units have no choice of window. Their 20 consecutive years begin with the relevant tax year (section 147(2)(a)).
What else changes when the deduction ends
- Withholding resumes. Both TDS notifications state that the payer is liable to deduct tax for any year other than the declared 20. Tell payers in good time, and update invoicing and treasury forecasts. See TDS relief for IFSC units.
- Tonnage tax option. An IFSC unit that has claimed the section 147 deduction may apply for the tonnage tax scheme within three months from the date the deduction ceases (section 231(3)), if it is otherwise a qualifying company. This is relevant to ship-owning units. See ship leasing.
- Investor-level reliefs under Schedule VI do not depend on the unit's own deduction window, but most have their own conditions and sunset dates. See Tax for non-resident investors.
Points to settle with your advisers
- Section 218 states a rate. The text we have read does not deal with surcharge or cess, and the overall effective rate should be confirmed for the entity concerned.
- Section 218 applies whenever total income includes income of the kind in section 147(3). Its interaction with a company's choice of the concessional regime in section 200, and with minimum alternate tax, should be modelled entity by entity.
- Whether a unit that began under section 80LA counts its 25-year block from its original permission year affects when section 218 starts to bite. See From the 1961 Act to the 2025 Act.
The choice of window is made once and shapes the unit's tax for a quarter of a century. It should be settled before the first return under section 147 is filed and before the first Form No. 1(N) goes to a payer.