Structure Options & What They Mean
- IFSC Units: International Financial Services Centres offer special incentives under the Income-tax Act, 2025. For instance, payments like interest, dividends, professional fees, brokerage etc. paid to eligible IFSC Units are exempt from TDS, under Notification No. 80/2026.(incometax.gov.in)
- SEZ Units: Often aligned with SEZ rules; certain benefits may be similar to IFSC but subject to SEZ Act, possibly customs/TDS benefits. Be sure to review whether IFSC-specific provisions (as legal units under SEZ Act) apply. The meaning of “Unit” is as defined under SEZ Act, 2005.(incometax.gov.in)
- Domestic Entity: Simpler jurisdictionally, but fewer special incentives. Standard TDS, filing, compliance obligations apply under the new Act and Rules.
Tax Incentives & TDS Reliefs to Use
- Notification No. 80/2026 [F. No. 275/19/2026-IT(B)]: Interest, dividends, professional fees, commission, brokerage or “other financial service related income” received by eligible IFSC units are exempt from TDS under the new Act.(incometax.gov.in)
- Notification No. 75/2026 (relating to ship lease rent) grants non-deduction of TDS on ship lease rent paid to IFSC Units under section 147 of the Act.(incometax.gov.in)
Practical Steps to Incorporate & Qualify
- Incorporation Location: Establish the entity in an IFSC or SEZ as per definitions in SEZ Act, 2005, ensure unit obtains “IFSC Unit” status.
- Choice Document: For TDS exemption on ship lease rent, lessor must furnish a statement-cum-declaration for 20 consecutive tax years; lessee must receive a copy and report payments.(incometax.gov.in)
- Ensure you register with appropriate authorities, maintain correct statutory records under the Income-tax Rules, 2026.
- Align contracts to reference IFSC status to capture TDS/lease-rent exemptions.
Risks and Compliance Traps
- IFSC status requirements are strict: not every SEZ unit qualifies. Ensure legal status under SEZ Act and eligibility.
- The non-deduction of TDS rests on furnishing declarations; missing these risks default withholding and penalties.
- Audits focus on cross-border payments; documentation must match notification forms and statements.
Example: Which Structure Makes Sense?
Startup A is a blockchain financial service provider. Incorporating in IFSC allowed it to receive commission income and brokerage payments without TDS, improving cash flow. Startup B in a domestic jurisdiction must manage higher TDS withholding, leading to delayed refunds.
If both are similar operationally, but IFSC-registered Startup A gains cash flow and tax certainty benefits, while domestic Startup B enjoys simpler logistics but higher upfront withholding cost.
Actionable Checklist
- Decide IFSC vs SEZ vs domestic based on expected income streams and cash‐flow sensitivity.
- Apply for IFSC status early; prepare required declarations/documents for TDS benefits.
- Review contracts to reference status and ensure counterparties are aware to avoid default TDS.
- Monitor upcoming CBDT notifications as rules evolve. Regularly review whether act or form changes affect entity obligations under the Income-tax Rules, 2026.