Who can claim and for how long
Section 147(1) allows a deduction equal to 100% of income of the kind described in section 147(3) to two classes of assessee:
- a scheduled bank, or a bank incorporated outside India, that has an Offshore Banking Unit in a Special Economic Zone; and
- a unit of an International Financial Services Centre (IFSC). "Unit" takes its meaning from section 2(zc) of the Special Economic Zones Act, 2005.
Section 147(2), as substituted by the Finance Act, 2026, sets the period:
- IFSC units: 20 consecutive tax years out of 25 years beginning with the relevant tax year, at the option of the unit.
- Offshore Banking Units: 20 consecutive tax years beginning with the relevant tax year. Where the tenth year of the earlier 10-year deduction under section 80LA(1) ended on 31 March 2025, a further 10 consecutive years runs from the tax year beginning on 1 April 2026.
The relevant tax year for an IFSC unit is the tax year in which it obtained permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the Securities and Exchange Board of India Act, 1992 or the International Financial Services Centres Authority Act, 2019 (section 147(6)(a)). The 25-year block is therefore counted from the date of the regulatory permission or registration, not from the date the unit first earns income. Keep that document and its date on file: it fixes every later calculation.
What counts as eligible income (section 147(3))
The deduction applies only to income from:
- an Offshore Banking Unit located in a Special Economic Zone;
- the business activities referred to in section 6(1) of the Banking Regulation Act, 1949, carried on with undertakings in a Special Economic Zone or with entities that develop, or develop and operate, or develop, operate and maintain, a Special Economic Zone;
- the approved business activities of a unit of an IFSC set up in a Special Economic Zone; and
- the transfer of an aircraft or a ship leased by such a unit, if the unit commenced its business operations by 31 March 2030 (section 147(3)(d)).
"Aircraft" and "ship" have the meanings in Schedule VI (Note 3): an aircraft includes a helicopter, an engine of either, or any part; a ship includes an ocean vessel, its engine, or any part.
The word that matters most in the third limb is approved. Income from activities outside the unit's IFSCA permission or registration is not eligible income, even if it is booked in the unit. Map each revenue line to the permitted activity before the first return is filed.
The splitting-up test (section 147(5))
For an Offshore Banking Unit or any other unit that commences operations on or after 1 April 2026, the deduction is available only if the unit is not formed by splitting up, reconstruction or reorganisation of a business already in existence in India, or by transfer of such a business.
This matters most to Indian groups moving an existing activity into GIFT IFSC. A new unit that takes over existing Indian clients, staff or contracts should be able to show why it is a new business rather than a transfer of an old one. The enacted text does not set out exceptions to this test.
How the deduction is claimed
Section 147(4) allows the deduction only if the return of income is accompanied by:
- a report from an accountant, in the prescribed form, certifying the correctness of the claim; and
- a copy of the permission obtained under section 23(1)(a) of the Banking Regulation Act, 1949, or the permission or registration obtained under the International Financial Services Centres Authority Act, 2019.
The prescribed report is Form No. 35 under rule 69. The form reaches eligible income by deducting, from gross income, the gross income not received in convertible foreign exchange. Income received in Indian rupees therefore falls outside the deduction even if it comes from an approved activity.
The same 20 consecutive years are declared to payers in Form No. 1(N), which switches off tax deduction at source on specified receipts. See TDS relief for IFSC units. The choice of years in that form and in the return should be the same.
How section 147 sits with the rest of the Act
- Concessional regimes. A domestic company that opts for the concessional rate in section 200 keeps the section 147 deduction for its IFSC unit (section 200(4)). Section 202(5) makes the same allowance in the new regime for individuals, Hindu undivided families and other persons covered by section 202.
- Years outside the window. Section 218 taxes income of the kind in section 147(3) at 15%. See Tax after the deduction period.
- Minimum tax. A unit with no taxable income may still pay minimum alternate tax or alternate minimum tax. See Minimum alternate tax for IFSC units.
How the deduction interacts with minimum alternate tax and the section 218 rate in a given case depends on the entity form, the regime chosen and the years selected. That is a matter for specific tax advice, not a general rule.