CBDT Grants TDS Exemption to Specified IFSC Units: Eligibility, Covered Payments and Compliance Requirements

The Central Board of Direct Taxes (“CBDT”), through Notification No. 80/2026 dated 10 July 2026, has introduced a significant tax compliance relief for specified entities operating in an International Financial Services Centre (“IFSC”). The notification provides that no tax is required to be deducted at source on specified payments made to eligible IFSC units, subject to fulfilment of prescribed conditions.

Issued under Section 400(1), read with Section 147 of the Income-tax Act, 2025, the notification is deemed to have come into force from 1 April 2026. It covers 14 categories of IFSC units and identifies the precise nature of receipts eligible for non-deduction of tax.

The measure is particularly relevant for entities operating from GIFT IFSC, including banking units, fund management entities, broker-dealers, investment advisers, finance companies, registered distributors, investment bankers and FinTech entities.

Background and purpose of the notification

Eligible IFSC units may claim a deduction under Section 147 of the Income-tax Act, 2025 for qualifying income earned from specified businesses. However, in the absence of a specific non-deduction mechanism, payers could still be required to deduct tax at source from payments made to such units.

This creates a timing mismatch. Even where the ultimate income is eligible for deduction, the recipient may suffer TDS and subsequently be required to claim a refund while filing its income-tax return. Such deduction can affect working capital, create refund dependency and increase reconciliation and compliance requirements.

Notification No. 80/2026 addresses this issue by allowing specified payers to make eligible payments to qualifying IFSC units without deducting tax, provided the recipient submits the prescribed declaration and both parties comply with the reporting requirements.

The notification is therefore not a blanket exemption for every payment received by an IFSC entity. It is limited by:

• the category of the IFSC unit;
• the nature of the receipt;
• the period selected for claiming the Section 147 deduction;
• the registration status of the unit; and
• compliance with Form No. 1(N).

Payments eligible for non-deduction of tax

The relief applies only to the specific receipts listed against each category of IFSC unit.

IFSC unit	Nature of receipt covered
Banking Unit	Interest on external commercial borrowings or loans, professional fees, referral fees, brokerage income and commission income from factoring and forfaiting services
IFSC Insurance Intermediary Office	Insurance commission
Finance Company	Interest on external commercial borrowings or loans, dividend income and commission from factoring and forfaiting services
Finance Unit	Interest on external commercial borrowings or loans, dividend income and commission from factoring and forfaiting services
Fund Management Entity	Professional fees
Broker-Dealer	Dividend income
Investment Adviser	Investment advisory fees
Registered Distributor	Distribution fees and commission fees
Custodian	Professional fees and commission fees
Credit Rating Agency	Credit rating fees
Investment Banker	Investment banking fees
Debenture Trustee	Trusteeship fees
ITFS	Commission income
FinTech Entity	Technical or professional fees and commission income

The notification also maps each receipt to the relevant TDS provision under Section 393 of the Income-tax Act, 2025. For example, professional and advisory fees are generally linked to the applicable provision for professional payments, while commission and brokerage receipts are mapped to the provision governing commission or brokerage.

This payment-specific approach is important. An eligible IFSC unit may receive several types of income, but non-deduction will apply only where the receipt is expressly covered by the notification.

Key eligibility conditions

To claim the benefit, the recipient must remain an IFSC unit within the meaning of the Income-tax Act, 2025 and the Special Economic Zones Act, 2005.

The IFSC unit must also hold a valid registration or approval under the relevant regulation or circular. The benefit may therefore be affected where the unit’s registration expires, is surrendered, suspended or no longer covers the activity from which the income arises.

Requirement to furnish Form No. 1(N)

The central compliance requirement for the recipient is submission of a statement-cum-declaration in Form No. 1(N) to the payer.

The form requires the IFSC unit to provide:

• name and PAN;
• name and address of the IFSC unit;
• contact number and email address;
• relevant tax year;
• details of the approval or registration;
• name of the granting authority;
• date and reference number of registration;
• the 20-year period selected for claiming the deduction; and
• the initial tax year for which the deduction was claimed.

The declarant must confirm that the unit is engaged in an eligible business, qualifies for deduction under Section 147 and continues to operate as an IFSC unit during the relevant tax year.

The declaration must be signed by a person authorised to sign the return of income under Section 265 of the Income-tax Act, 2025.

Importantly, Form No. 1(N) is not a one-time declaration for the entire period. The notification requires the statement-cum-declaration to be furnished and verified for each tax year falling within the selected 20 consecutive tax years.

Obligations of the payer

The payer may refrain from deducting tax only after receiving Form No. 1(N) from the eligible IFSC unit.

Accordingly, non-deduction should apply only to payments made or credited after the date on which the payer receives the declaration. Tax already deducted before receipt of the form may not automatically be covered by the relaxation.

The payer must also disclose details of payments on which tax has not been deducted pursuant to the notification in the applicable TDS statement under Section 397(3)(b), read with Rule 219 of the Income-tax Rules, 2026.

Thus, the notification provides relief from deduction but does not eliminate the payer’s reporting responsibilities.

From a compliance perspective, the payer should maintain:

• a copy of Form No. 1(N);
• evidence of the date of receipt;
• proof of the payee’s IFSC registration;
• mapping of the payment to the eligible receipt category;
• invoice and agreement documentation; and
• reconciliation with the TDS return.

Twenty-year limitation

The non-deduction facility is available only during the 20 consecutive tax years selected by the IFSC unit for claiming deduction under Section 147.

The recipient must specify the beginning and end of the selected period in Form No. 1(N). Where a payment relates to a year outside the declared period, the payer will remain liable to deduct tax in accordance with the applicable provisions.

This makes the selection of the 20-year period commercially important. IFSC units should ensure consistency between:

• Form No. 1(N);
• income-tax returns;
• tax computation;
• the year in which Section 147 deduction is first claimed; and
• declarations issued to different payers.

Any mismatch may expose the payer to a TDS default and the recipient to questions regarding eligibility.

Suggested compliance checklist

Eligible IFSC units should:

1. Confirm that their entity category is covered.
2. Map each revenue stream with the specified receipts.
3. verify the validity and scope of the IFSCA registration.
4. Confirm the selected 20-year Section 147 period.
5. Furnish Form No. 1(N) separately for every tax year.
6. Obtain acknowledgement from each payer.
7. Reconcile exempt receipts with invoices, books and income-tax returns.

Payers should independently verify the declaration, apply non-deduction only after receipt of the form and report the relevant payments in the prescribed TDS statement.

Conclusion

Notification No. 80/2026 is an important tax administration measure supporting the development of India’s IFSC ecosystem. By removing TDS on specified payments to eligible IFSC units, it reduces cash-flow blockage and unnecessary refund claims.

At the same time, the benefit is conditional and requires annual documentation, accurate classification of receipts and proper reporting by both the recipient and payer. IFSC entities should therefore establish a structured process for issuing Form No. 1(N), validating the 20-year period and reconciling eligible income to ensure that the relief is claimed correctly and consistently.