CBDT Grants TDS Exemption on Key Payments to Eligible IFSC Units

OVERVIEW 


  • The Central Board of Direct Taxes (CBDT) has introduced major tax compliance relief by exempting specified payments made to eligible International Financial Services Centre (IFSC) units from Tax Deducted at Source (TDS), subject to prescribed conditions.
  • Through Notification S.O. 3743(E), issued on July 10, 2026, the central government, exercising its powers under Section 400(1) read with Section 147 of the Income-tax Act, 2025, has exempted specified categories of payments to eligible IFSC units from TDS, subject to prescribed eligibility and compliance requirements.
  • 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.
  • This move is aimed at strengthening India’s IFSC ecosystem and enhancing the ease of doing business for financial institutions operating from these centres.

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.
  • The exemption applies to payments made to a broad spectrum of IFSC units which include: 1. Banking Units 2. Finance Companies 3.Finance Units 4. Fund Management Entities 5. Broker Dealers 6. Investment Advisers 7. Registered Distributors 8. Custodians 9. Credit Rating Agencies 10. Investment Bankers 11. Debenture Trustees 12. IFSC Insurance Intermediary Offices 13. International Trade Finance Service (ITFS) Units 14. FinTech Entities.

PAYMENTS ELIGIBLE FOR TDS EXEMPTION 

 
  • 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
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.
 

CONDITIONS FOR AVAILING THE EXEMPTION

 
  • The TDS exemption does not apply automatically. An eligible IFSC unit must actively claim the exemption by complying with the prescribed conditions.
  • The most important requirement is to furnish a Statement-cum-Declaration in Form No. 1(N) to the payer. If the form is not submitted, the payer must deduct tax at source under the ordinarily applicable provisions.
  • The IFSC unit must provide Form No. 1(N) separately to every payer from whom it expects to receive payments eligible for the TDS exemption.
  • The declaration must specify the twenty (20) consecutive tax years selected under Section 147. The TDS exemption applies only during this period; normal TDS provisions apply outside it.

OBLIGATIONS OF THE PAYER

 
  • The TDS exemption removes the payer’s obligation to deduct tax once a valid Form No. 1(N) is received from the eligible IFSC unit.
  • 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.
  • Incorrect reporting may result in compliance issues. Therefore, although TDS deduction is waived, accurate reporting remains mandatory.

CONCLUSION

 
  • The notification reduces the cost of doing business through India’s IFSC by removing the requirement to deduct TDS on specified payments to eligible IFSC units.
  • For multinational enterprises, this translates into improved cash flow, fewer TDS refund claims, lower compliance and administrative costs, and more efficient cross-border financing and financial service transactions.
  • Combined with the existing tax incentives available to qualifying IFSC units, the measure further strengthens the commercial case for locating regional treasury, fund management, financing, and investment activities in GIFT City.

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