Entity Setup
Entity Setup for Tech Startups in India: Choosing Between IFSC, SEZ, or Domestic Jurisdiction
Key factors for structuring a tech-startup in India: tax breaks, TDS advantages, and operational ease comparing IFSC, SEZ units versus domestic entities.
By NomadicTax Research Team • 5-8 min read • August 15, 2026
## 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](https://www.incometax.gov.in/iec/foportal/latest-news?page=%2C0&year=2026&utm_source=openai))
- **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](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai))
- **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](https://www.incometax.gov.in/iec/foportal/latest-news?page=%2C0&year=2026&utm_source=openai))
- **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](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai))
## Practical Steps to Incorporate & Qualify
1. **Incorporation Location**: Establish the entity in an IFSC or SEZ as per definitions in SEZ Act, 2005, ensure unit obtains “IFSC Unit” status.
2. **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](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai))
3. Ensure you register with appropriate authorities, maintain correct statutory records under the Income-tax Rules, 2026.
4. 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.