CBDT Notifies TDS Exemption for 14 IFSC Unit Categories Under Income Tax Act 2025

On July 10, 2026, the Central Board of Direct Taxes (CBDT) issued Notification No. 80/2026, exempting 14 categories of International Financial Services Centre (IFSC) units from tax deduction at source (TDS) on specified payments made to them. The notification, issued under Section 400(1) read with Section 147 of the Income Tax Act, 2025, has retrospective effect from April 1, 2026, and is a significant step in India's strategy to make GIFT City a globally competitive financial hub.

Legal Framework: Section 147 and Section 400 of the Income Tax Act 2025

The Income Tax Act, 2025, replaced the Income Tax Act, 1961, with effect from April 1, 2026. Under the new Act, Section 147 provides a special deduction regime for eligible IFSC units, allowing them a tax holiday for 20 consecutive tax years chosen by the unit. Section 400(1) empowers the CBDT to issue guidelines with the prior approval of the Central Government for removing difficulties in implementing collection and recovery provisions.

Notification 80/2026 uses this combined authority to exempt specified payments to IFSC units from TDS during the chosen 20-year deduction period. This eliminates the cash flow burden that TDS creates for IFSC entities and brings India's IFSC regime closer to the zero-tax environments offered by competing international financial centres. These changes are part of a broader set of compliance changes effective from 2026.

The 14 Categories of Eligible IFSC Units

The notification covers the following categories of IFSC units:

1. Banking units licensed by the International Financial Services Centres Authority (IFSCA)

2. IFSC insurance intermediary offices

3. Finance companies

4. Finance units

5. Fund management entities

6. Broker dealers

7. Investment advisers

8. Registered distributors

9. Custodians

10. Credit rating agencies

11. Investment bankers

12. Debenture trustees

13. FinTech entities

14. International Trade Finance Service (ITFS) units

Each category must hold a valid IFSCA registration and must be operating within a designated IFSC to qualify for the exemption. The breadth of coverage is notable: it extends the TDS exemption beyond banking and insurance to encompass the full spectrum of financial services that GIFT City is designed to attract.

Scope of Exempt Payments

The TDS exemption applies to specified categories of payments, including interest, dividends, professional fees, commission, brokerage, and other financial service-related income received by eligible IFSC units. Payments covered are those that would ordinarily attract TDS under the consolidated TDS provisions of Section 393 of the Income Tax Act, 2025.

It is important to note that the exemption applies only during the 20 consecutive tax years selected by the IFSC unit for claiming the deduction under Section 147. For any tax year falling outside this selected period, normal TDS provisions continue to apply.

Form 1(N) Compliance Requirement

To avail the TDS exemption, the IFSC unit (as the payee) must furnish Form 1(N) to the payer. This form requires the IFSC unit to declare details of the 20 consecutive tax years for which it opts for claiming the Section 147 deduction. Without this form, the payer cannot apply the TDS exemption and must deduct tax at the applicable rates.

Additionally, the payer is required to report all such payments in the prescribed TDS statement filed under Section 397(3)(b) read with Rule 219 of the Income Tax Rules, 2026. This ensures that the tax authorities maintain visibility over exempt payments even where TDS is not deducted. For payers who have already deducted TDS on eligible payments since April 1, the process for claiming a TDS refund becomes relevant.

Retrospective Effect from April 1, 2026

The notification is deemed to have come into force from April 1, 2026, the date on which the Income Tax Act, 2025, took effect. This retrospective operation is significant because it covers the entire period from the commencement of the new Act. Any TDS already deducted on payments to eligible IFSC units between April 1, 2026, and the notification date of July 10, 2026, would need to be addressed, either through refund claims or adjustments in subsequent TDS returns.

IFSC units and their counterparties should review payments made during this interim period and consider filing revised returns where necessary. Any disputes regarding TDS applicability during this period can be taken up before the Income Tax Appellate Tribunal.

Strategic Context: GIFT City and India's IFSC Ambitions

India's GIFT City IFSC in Gandhinagar, Gujarat, has been positioned as a rival to financial centres in Singapore, Dubai, and Hong Kong. A zero or near-zero tax regime for IFSC units is critical to attracting global financial institutions to set up operations in GIFT City.

The TDS exemption under Notification 80/2026 complements other tax incentives already available to IFSC units, including the 100 percent income tax holiday under Section 147 for the chosen 20-year period, exemption from Minimum Alternate Tax (MAT), and a concessional GST framework. Together, these measures create a comprehensive tax incentive package for financial services entities operating from the IFSC.

For businesses and financial institutions evaluating whether to establish IFSC units, the elimination of TDS compliance is a practical operational benefit. TDS creates cash flow friction, particularly for entities dealing in high-volume, low-margin financial transactions such as brokerage and advisory services. With the July 31 deadline approaching, entities should also ensure their income tax return filings reflect any TDS adjustments arising from this notification.

Key Takeaways

• CBDT Notification No. 80/2026 dated July 10, 2026, exempts 14 categories of IFSC units from TDS on specified payments.

• The notification is issued under Section 400(1) read with Section 147 of the Income Tax Act, 2025, with retrospective effect from April 1, 2026.

• Eligible categories include banking units, insurance intermediary offices, finance companies, fund management entities, broker dealers, investment advisers, custodians, credit rating agencies, investment bankers, debenture trustees, FinTech entities, and ITFS units.

• IFSC units must furnish Form 1(N) declaring their chosen 20-year deduction period to qualify for the exemption.

• Payers must continue to report exempt payments in TDS statements under Section 397(3)(b) read with Rule 219.