TDS Exemption for Payments to IFSC Units: What You Need to Know

The Central Board of Direct Taxes (CBDT) has introduced a significant exemption from Tax Deduction at Source (TDS) for specific payments made to eligible units operating within an International Financial Services Centre (IFSC). This exemption, notified under Section 147 read with Section 400(1) of the Income Tax Act, 2025, is effective retrospectively from April 1, 2026, and aims to bolster the ease of doing business within India’s IFSC ecosystem. For businesses making payments to IFSC units, this means a streamlined process, provided the IFSC unit complies with the new declaration requirements.

Understanding the New TDS Exemption for IFSC Units

This recent notification, published on July 10, 2026, brings a welcome change for both payers and eligible IFSC units. While the notification date is in July, its provisions apply from April 1, 2026, ensuring that transactions from the start of the current financial year are covered. The CBDT has explicitly stated that this retrospective application does not adversely affect any person, providing clarity and certainty for past transactions within this period.

This exemption is a strategic move to enhance the attractiveness and operational efficiency of IFSCs in India. By reducing the compliance burden associated with TDS for specific transactions, the government is fostering a more conducive environment for financial services and related activities within these special economic zones. For you, as a professional or an SME dealing with IFSC entities, understanding the scope and conditions of this exemption is crucial for accurate tax compliance and cash flow management.

Which IFSC Units and Payments Are Covered?

The TDS exemption is not universal across all IFSC entities or all types of payments. It is specifically tailored to a defined list of eligible IFSC units and a comprehensive, yet specific, set of income streams. This targeted approach ensures that the benefits are directed towards activities that align with the strategic objectives of the IFSC framework.

Covered IFSC Units:

The exemption applies to payments made to a broad spectrum of IFSC units, reflecting the diverse activities undertaken within these centres. These include:

• Banking Units
• Finance Companies
• Finance Units
• Fund Management Entities
• Broker Dealers
• Investment Advisers
• Registered Distributors
• Custodians
• Credit Rating Agencies
• Investment Bankers
• Debenture Trustees
• IFSC Insurance Intermediary Offices
• International Trade Finance Service (ITFS) Units
• FinTech Entities

If you are making payments to any of these types of entities located in an IFSC, you should assess whether the payment type also qualifies for the exemption.

Payments Eligible for TDS Exemption:

The range of income streams covered is extensive, encompassing many core activities of financial services. These include:

• Interest income on External Commercial Borrowings (ECBs) and loans
• Professional fees
• Technical fees
• Investment advisory fees
• Distribution and commission income
• Referral fees
• Brokerage income
• Credit rating fees
• Trusteeship fees
• Insurance commission
• Dividend income received by specified IFSC entities
• Commission income from factoring and forfaiting services

It is important to note that only these specified payments are exempt. Any other payments made to an IFSC unit that are not on this list would still be subject to the usual TDS provisions under the Income Tax Act, 2025.

Conditions for Availing the Exemption: The Role of Form No. 1(N)

The TDS exemption is not automatic. The onus is on the eligible IFSC unit to proactively claim this benefit by fulfilling specific conditions. The most critical step involves furnishing a Statement-cum-Declaration in Form No. 1(N) to the payer. Without this form, the payer is obligated to deduct TDS as per standard provisions.

Key Requirements for Form No. 1(N):

1. Declaration Submission: The IFSC unit must submit Form No. 1(N) to each payer from whom it expects to receive exempt payments.
2. Specification of Tax Years: Crucially, the declaration must specify twenty consecutive tax years for which the unit opts to claim deduction under Section 147 of the Income Tax Act, 2025. This is a one-time election for a defined period.
3. Validity Period: The TDS exemption is strictly tied to this chosen twenty-year window. For any tax year outside this opted period, whether before or after, the normal TDS provisions will apply. This means an IFSC unit needs to carefully plan its election of the twenty consecutive tax years to maximise the benefit.

Details Required in Form No. 1(N):

Form No. 1(N) is a comprehensive document designed to ensure the eligibility and proper identification of the IFSC unit. It mandates the inclusion of:

• Name and Permanent Account Number (PAN) of the IFSC unit.
• Registration or permission details of the unit, including the relevant authority that granted the approval.
• The specific twenty consecutive tax years for which the deduction under Section 147 is being claimed.
• A clear declaration confirming the eligibility of the unit under Section 147.

The form must be duly verified and signed by an authorized person competent to sign the income-tax return of the entity. Payers should ensure they receive a complete and properly signed Form No. 1(N) before processing payments without TDS.

Obligations of the Payer

While the TDS exemption relieves payers from the responsibility of deducting tax at source, it does not entirely remove their reporting obligations. Once a payer receives a valid Statement-cum-Declaration in Form No. 1(N) from an eligible IFSC unit, they can proceed to make the specified payments without deducting TDS.

However, it is imperative that the payer still reports these payments in the prescribed TDS statements under the Income-tax Rules, 2026. This ensures that the tax authorities have a complete record of transactions, even if no tax was deducted. Failure to report these payments correctly could lead to compliance issues for the payer. Therefore, while the deduction burden is lifted, the reporting discipline remains critical.

Practical Implications and Compliance

For businesses making payments to IFSC units, the primary practical implication is the need to verify the receipt of Form No. 1(N). Without this form, you must continue to deduct TDS. It is advisable to maintain a robust record-keeping system for all Form No. 1(N) declarations received, linking them to the respective payments made. This will serve as proof of compliance in case of any future queries from tax authorities.

For IFSC units, the strategic decision of choosing the twenty consecutive tax years for Section 147 deduction is paramount. This choice should align with the unit’s long-term business plan and expected profitability to maximise the benefit of the exemption. Furthermore, ensuring timely and accurate submission of Form No. 1(N) to all relevant payers is crucial to avoid unintended TDS deductions.

This exemption underscores the government’s commitment to developing IFSCs as global financial hubs. By simplifying tax compliance for specific transactions, it aims to attract more businesses and investment into these centres, ultimately contributing to India’s economic growth. Staying informed about such regulatory changes is key to navigating the evolving tax landscape effectively.