Entity Setup
Setting Up a Business in India: IFSC Units & TDS Exemptions Explained
Understand how Income Tax (Third Amendment) Rules, 2026 and exemptions from TDS for IFSC units change the game for companies in India aiming for efficient cross-border operations.
By NomadicTax Research Team • 5-8 min read • August 14, 2026
## Introduction
India’s financial regulatory environment is evolving quickly. Recent changes under the Income-tax (Third Amendment) Rules, 2026, the Income-tax Act 2025, and related notifications provide **new avenues for businesses**, especially in International Financial Services Centre (IFSC) units. These updates impact lease-rent deductions, TDS exemptions, and return requirements. Understanding these can inform **entity setup strategies**, especially for foreign companies exploring India or IFSC-based operations.
## Key Regulatory Changes
| Change | What It Does | Who It Impacts |
|---|---|---|
| **Lease and Supplemental Lease Rent to IFSC Units Not Subject to TDS** (Notification No. 75/2026, effective 1-Apr-2026) | Payments by lessees to IFSC units in respect of lease or supplemental lease rent for ships are exempt from deductions at source (TDS) under Section 147 of the Income-tax Act, 2025, subject to certain filing of declarations. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai)) | Shipping businesses, maritime-related lessors and lessees leveraging IFSC status. |
| **Exemptions from TDS for IFSC Eligible Units on Specified Payments** (Notification No. 80/2026) | Payments such as interest, dividends, professional fees, brokerage, commission, etc., to eligible IFSC units are exempt from TDS under the Income-tax Act, 2025. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news?link=2&link=6&page=%2C0&year=2026&utm_source=openai)) | Investment funds, service providers, and businesses domiciled in IFSCs receiving these kinds of payments. |
## Entity Setup Implications
1. **IFSC Unit Registration Matters** — To qualify for these TDS exemptions, the recipient must be a recognised IFSC Unit, following clear criteria under SEZ laws. Ensure entity registration and compliance with IFSC rules. Regulator definitions: “International Financial Services Centre” as defined in SEZ Act, lessor/lessee relationships. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai))
2. **Declarations & Form Filings are Essential** — For example, under the lease rent rule, lessors must submit a “statement-cum-declaration” in Form No. 1(N) covering details of prior years. Missing or incomplete declarations may lead to TDS being deducted despite the exemption. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-07/EnNotification-no-75-2026.pdf?utm_source=openai))
3. **Select Your Payments Carefully** — Only certain categories of payments are covered: **interest, dividends, professional fees, commission, brokerage, financial-service payments**, etc. Understanding the nature of transactions is key. Payments outside specified categories will not enjoy exemption. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news?link=2&link=6&page=%2C0&year=2026&utm_source=openai))
4. **Effective Dates** — These exemptions are effective from 1 April 2026. For financial planning, align forecasts and cash-flows accordingly. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news?link=2&link=6&page=%2C0&year=2026&utm_source=openai))
## Practical Examples
- A UK-based fund operating through IFSC receives dividends from Indian companies. Under the new rules, these are **no longer subject to TDS** if it qualifies as an eligible IFSC unit. This implies improved post-tax returns.
- A ship leasing company lessors in the IFSC leasing vessels to lessees: lease rent payments are exempt from TDS, provided the lessor files the statement-cum-declaration. This improves cash flows and reduces certificate compliance burden.
## Actionable Steps
- When establishing an entity in India, **consider IFSC location** if your business will receive payments like interest, dividends, or lease rents.
- Ensure the entity is properly registered as an IFSC Unit under applicable law.
- Maintain proper documentation and file required declarations (e.g. Form 1(N)).
- Review payment contracts to ascertain whether the payee qualifies and whether the type of payment is covered.
- Coordinate with tax advisors and legal counsel to ensure that structures align with the exemptions and avoid inadvertent TDS.
## Summary
Setting up a business in India that leverages these recent IFSC-based TDS exemptions can provide significant tax efficiency, especially for cross-border service providers, shipping lessors, and financial units. The combination of **entity selection**, **payment categorisation**, **timing**, and **documentation** is critical. With thoughtful planning, businesses can improve cash-flows, reduce withholding burdens, and gain competitive advantage.