Tax Planning
India: Leasing Aircraft & Non-Deduction of TDS for IFSC Units Explained
CBDT rules now prevent TDS deductions on aircraft lease rent to IFSC units—a major benefit for international aviation finance and investors.
By NomadicTax Research Team • 5-8 min read • August 15, 2026
## What’s New
India’s CBDT issued **Notification No. 74/2026**, effective from **1 April 2026**, specifying that **no deduction of tax (TDS)** shall be made under section 393(1) on payments made as **lease rent or supplemental lease rent** when the lessor is a **Unit located in an International Financial Services Centre (IFSC)**, for aircraft lease agreements. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/ENnotification-no-74-2026.pdf?utm_source=openai))
## Elements of the Rule
- Applies to **Units in IFSC** leasing aircraft to lessees; lessors must provide a **statement-cum-declaration in Form No. 1(N)** covering 20 years of lease rent history as required. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/ENnotification-no-74-2026.pdf?utm_source=openai))
- Audit & systems divisions of the Income Tax Department will prescribe procedures to ensure secure data capture & document retention. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/ENnotification-no-74-2026.pdf?utm_source=openai))
- The lease must be an aircraft, as defined in Schedule VI (Note 3) of the Income-tax Act, 2025. Units must satisfy criteria under SEZ Act sections defining IFSC Units. Effective from FY starting 1 April 2026. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/ENnotification-no-74-2026.pdf?utm_source=openai))
## Why It’s Significant
- **Cashflow benefit**: Lessees don’t have to deduct TDS, easing compliance and financial outflows.
- **Attracting IFSC investment**: Less friction for internationally structured leases and financing via IFSCs (e.g. GIFT IFSC, with favorable regulatory environment).
- **Global aviation finance**: Familiar structures (like aircraft leasing companies) benefit from clarity and reduced withholding burdens.
## How to Use It Strategically
- **Lessors** should ensure that they meet the definition of “Unit in IFSC” and complete Form 1(N) properly for lessees to avoid TDS issues.
- **Lessees** must verify declaration from lessors, retain Form 1(N), and ensure correct classification before releasing payments without deduction.
- For inbound investors in IFSC units offering leases to lessees abroad, this can factor significantly into financial modelling (lower cost of funds).
## Example
A foreign aircraft leasing company with a Unit in GIFT IFSC leases an aircraft to an airline customer in Mumbai. Under Notification 74/2026, the airline (lessee) isn’t required to deduct TDS on lease rent payments—provided the lessor furnishes Form 1(N). This improves cashflow for the lessor and simplifies compliance for the lessee.
## Risk Considerations
- Failure to furnish the required Form 1(N) can lead to non-eligibility and potential liability for the lessee to withhold TDS.
- Lessors & lessees should preserve lease documentation and the declaration’s validity.
- Legal definitions under SEZ/IFSC acts must be met — otherwise risk of misclassification.
## Final Thoughts
This TDS non-deduction rule is a welcome clarity for those structuring aircraft leases via IFSC Units. It reduces administrative and financial burden. For aviation finance, IFSC Units are now more appealing destinations for establishing leasing entities.