Entity Setup
Entity Setup: Structuring an IFSC Unit under India’s Income-tax Act, 2025
A guide to establishing a unit in an International Financial Services Centre (IFSC), leveraging tax exemptions, compliance requirements, and procedural steps under India’s new tax regime.
By NomadicTax Research Team • 5-8 min read • August 23, 2026
## What is an IFSC Unit and Why It Matters
An **International Financial Services Centre (IFSC) Unit** refers to financial services businesses located in special zones like GIFT City that enjoy a suite of incentives under the **Income-tax Act, 2025**. This includes *tax holidays*, reduced TDS/TCS obligations, and other fiscal hooks structured to attract cross-border capital and specialized financial operations.
## Key Legal and Tax Regimes for IFSC Units
| Provision | Benefit | Statutory Clause / Rule |
|---|---|---|
| Deduction under Section 147 | IFSC Units can avail tax holiday for any _ten consecutive tax years out of fifteen_, with exemption on **eligible income**. This withholding applies to income under Section 147(1) or (2). | Income-tax Act, 2025, Section 147 ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-03/En-Notified-IT-Rules-2026-20-03-2026.pdf?utm_source=openai)) |
| Notification No. 80/2026 | Payments such as interest, dividends, professional fees, commission, brokerage, and financial service income received by eligible IFSC Units are **exempt from TDS**. | CBDT Notification No. 80/2026 ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news/11888?utm_source=openai)) |
| Notification No. 74/2026 | **Aircraft lease rent** paid to IFSC Units will **not** be subjected to TDS under Section 147. Similar exemption for **ship lease rent** under Notification 75/2026. | CBDT Notification No. 74/2026 and No. 75/2026 ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/node/11591?utm_source=openai)) |
## Steps and Compliance Requirements for Setting Up
1. **Registration and Permissions**: Obtain valid registration under the relevant statute (e.g. SEZ Act or IFSC Authority Act). The unit must certify its start date, nature of business, etc. Form No. 35 supports claims under Section 147. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-03/En-Notified-IT-Rules-2026-20-03-2026.pdf?utm_source=openai))
2. **Choosing the Deduction Period**: IFSC Units must elect to avail deduction under Section 147 for *ten consecutive tax years out of fifteen*. The election is often made at setup or at commencement for eligible periods. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-03/En-Notified-IT-Rules-2026-20-03-2026.pdf?utm_source=openai))
3. **Form 1-28 Statement-cum-Declaration**: Eligible IFSC Units file this form to enable payers not to deduct TDS on specified payments. It must include details of the entity, business, and the period of deduction election. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/node/11591?utm_source=openai))
4. **TDS Exemptions & No Deduction Triggers**: Understand exactly which payments are eligible for exemption (e.g. financial service-related income, aircraft, ship lease rent). Ensure declarations are in place where required. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news/11888?utm_source=openai))
5. **Validation & Reporting**: Use e-filing tools and follow new **ITR-4 validation rules**, including proper disclosure of schedules, TDS details, matching IFSC bank codes etc. Ensure all Schedules are correctly populated. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-05/CBDT_e-Filing_ITR%204_Validation%20Rules_AY%202026-27.pdf?utm_source=openai))
## Example Scenario
Suppose **FinServeCo IFSC Ltd.**, registered under IFSC Authority with commencement of operations in AY 2027-28, elects ten consecutive tax years deduction under Section 147, and enters into aircraft leasing contracts. Under Notification No. 74/2026, lease rents payable to FinServeCo qualify for **no TDS withholding** once Form 1-28 has been submitted by FinServeCo and accepted by payers.
Meanwhile, FinServeCo must report its eligible gross income net of non-convertible foreign exchange income and related expenses via Form 35 and ITR rules. Failure to comply with declaration or reporting could result in TDS being applied despite exemptions.
## Practical Tips & Risks
- **Verify eligibility**: Ensure business is bona fide IFSC Unit, gets required registrations and permissions. Not every financial business qualifies.
- **Timing of election**: The deduction commencement year is critical; missing it can disrupt the consecutive 10-year window.
- **Maintain documentation**: Lease contracts, financial service invoices, declarations all need to be well-kept. Delays or inaccuracies may trigger TDS or challenge exemptions.
- **Monitor rule changes**: The 2026 tax rules have introduced new validation requirements like Schedules, matching IFSC codes. Stay updated. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-03/En-Notified-IT-Rules-2026-20-03-2026.pdf?utm_source=openai))
## Conclusion
Setting up an IFSC Unit under India’s new tax regime offers substantial benefits—tax holiday under Section 147, exemptions from TDS on specified payments, and bespoke reporting/validation tools. But capturing those benefits requires careful planning, firm registration, correct elections, timely declarations, and clean reporting. Done right, this structure can deliver competitive advantage for cross-border financial businesses and capital flows.