Compliance
Avoiding Surprises: India’s New Rules on TDS & IFSC Income Without Withholding
Exemptions for IFSC units and changes to withholding on payments such as dividends, interest & service fees — what taxpayers must watch.
By NomadicTax Research Team • 5-8 min read • September 12, 2026
## Background: What’s Changed with IFSC & TDS Exemptions
Under India’s **Income-tax Act, 2025**, specific payments made to **IFSC (International Financial Services Centre) units** are now eligible for exemption from **Tax Deducted at Source (TDS)**. This includes interest, dividends, professional fees, commission, brokerage, and other financial service-related income. Notification No. 80/2026 under Form rules provides this exemption.([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news?utm_source=openai))
These new TDS exemptions were issued via the **CBDT** and are intended to incentivize IFSC units by reducing compliance cost and improving cash flow. These changes came into effect from **1 April 2026** with the Income-tax Act 2025 enforcement.([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news?utm_source=openai))
## Who Benefits and When to Use These Provisions
- **IFSC units** in SEZs or Finance Centres receiving payments under specified heads (interest, dividends, professional fees, etc.) will not have tax deducted on those payments.
- **Payors** must verify that the recipient is a qualified IFSC unit, have correct documentation, and follow prescribed formats so that non-deduction is valid.
- **Recipients** should maintain compliance to remain on approved lists and ensure correctness of KYC/TIN documentation.
## Practical Compliance Advice
- When entering contracts or invoices, **insert clauses** that specify if the counterparty is an IFSC unit, so that payers can apply non-deduction safely.
- **Retain documentation** showing IFSC unit registration; include TIN, address and evidence. Documents should be preserved in case of a tax audit.
- Monitor whether your service or payment actually falls under “specified payments” per the notification; some payments may be outside definition and still be subject to TDS.
- Verify whether service providers, brokers, etc., correctly report under new rules; errors might lead to matching or dispute with the tax authority.
## Example Cases
- An IFSC unit in GIFT City provides legal consultation to a domestic client. Under new rules, payments for professional fees are exempt from TDS. The domestic client should ask for proof of IFSC registration to apply exemption.
- A non-IFSC firm providing services to an IFSC unit should invoice as usual; but from the IFSC unit side, ensure payment made without withholding when meeting notification criteria.
## Risks & Things to Check Fully
- Misclassification of recipient: a non-IFSC entity claiming IFSC status risks notices and tax demands.
- Incorrect TDS exemption leads to potential penalties for payers.
- Lack of clarity in documentation format or compliance could lead to withholding anyway, needing later refund or credit.
## Bottom Line
These exemptions smooth financial flows for IFSC units. Both payers and recipients must get their facts, documentation and contracts in order to take full advantage.