Section 147 · Deductions
Section 147 of the Income-tax Act, 2025 — Deduction for Units in International Financial Services Centre (IFSC) and Offshore Banking Units
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter VIII
📜 What the law says — Section 147, Income-tax Act 2025
147. (1) Where the following assessee has any income of the nature referred to
in sub-section (3), there shall be allowed a deduction equal to 100% of such
income:—
(a) a scheduled bank, or a bank incorporated under the laws of a country
outside India, and having an Offshore Banking Unit in a Special Economic
Zone; or
(b) a unit of an International Financial Services Centre.
[(2) Irrespective of anything contained in section 80LA of the Income-tax Act, 1961
13
(43 of 1961), the deduction shall be allowed,—
(a) for an entity mentioned in sub-section (1)(a),—
(i) for twenty consecutive tax years beginning from the relevant tax year;
and
(ii) in a case, where the tenth year, out of the period of ten consecutive
years of deduction allowed under section 80LA(1) of the said Act has
ended on the 31st March, 2025, for further ten consecutive years from
13. Substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to its substitution, sub-section
(2) read as under :
“(2) The deduction shall be allowed—
(a) for ten consecutive tax years beginning from the relevant tax year in the case of an
entity mentioned in sub-section (1)(a);
(b) for ten consecutive tax years out of fifteen years beginning from the relevant tax
year, at the option of an assessee, in the case of an entity mentioned in sub-section
(1)(b).”
the tax year beginning on the 1st April, 2026; and
(b) in the case of an entity mentioned in sub-section (1)(b), for twenty conse-
cutive tax years out of twenty-five years beginning from the relevant tax
year, at the option of an assessee.]
(3) The income referred to in sub-section (1) shall be the income from—
(a) an Offshore Banking Unit located in a Special Economic Zone; or
(b) the business activities referred to in section 6(1) of the Banking Regu-
lation Act, 1949 (10 of 1949), with undertakings in a Special Economic
Zone or entities that develop, develop and operate, or develop, operate
and maintain Special Economic Zone; or
(c) the approved business activities of any Unit of an International Financial
Services Centre set up in a Special Economic Zone; or
(d) transfer of an asset being, an aircraft or a ship, leased by a unit
In plain language
What Section 147 is about
Section 147 of the Income-tax Act, 2025 gives a powerful tax holiday to two types of financial-sector businesses: Offshore Banking Units (OBUs) located in a Special Economic Zone (SEZ), and Units set up in an International Financial Services Centre (IFSC) — India's flagship IFSC being GIFT City, Gandhinagar (Gujarat). In plain words, if you run an approved financial business from GIFT-IFSC (banking, fund management, insurance, aircraft/ship leasing, capital-market intermediation, etc.), a large slice of that income can be earned completely tax-free for several years.
This section is the re-numbered successor of Section 80LA of the old Income-tax Act, 1961. The substance is carried forward almost unchanged; only the section number and drafting style are new under the 2025 Act (effective 1 April 2026).
Who it applies to
- Scheduled banks (or foreign banks) operating an Offshore Banking Unit in an SEZ.
- Units of an IFSC registered/approved under the International Financial Services Centres Authority (IFSCA) Act, 2019 — for example, IFSC banking units, finance companies, fund management entities, and aircraft/ship leasing units.
- The deduction is business-linked — only income from the activity for which the unit received regulatory approval qualifies.
How much you can deduct and for how long
- Offshore Banking Units (OBUs): traditionally a 100% deduction for the first 5 years and 50% for the next 5 years of eligible income, running from the year the permission is obtained.
- IFSC Units: a 100% deduction of eligible income for any 10 consecutive years, chosen out of a 15-year window that begins from the year the unit gets its permission/registration. The unit picks the 10-year block that suits it best.
- Because it is a profit-linked deduction, the benefit reduces the amount of income on which tax is charged — a genuine tax holiday, not a mere deferral.
Key conditions to keep the benefit
- Valid regulatory approval: permission under the Banking Regulation Act, 1949 (for OBUs) or registration under the IFSCA Act, 2019 (for IFSC units) must be in place.
- Separate, audited books: the unit must maintain distinct accounts so eligible income is clearly identifiable.
- Chartered Accountant's report: the deduction must be supported by a CA certificate (historically Form 10CCF under the 1961 Act; a corresponding prescribed form applies under the 2025 rules) filed electronically along with the return.
- File the return on time: like most Chapter-VIII / profit-linked deductions, timely filing is essential to claim it.
How it interacts with other provisions and the practical picture
- No/low TDS in the IFSC: to make the holiday effective, several payments to and from IFSC units enjoy relaxed or nil withholding tax, so cash flow is not blocked during the tax-holiday years.
- Aircraft and ship leasing: gains on transfer of aircraft or ships by eligible IFSC leasing units that commence operations by 31 March 2030 are specifically covered, supporting India's leasing hub ambitions.
- Alternate/Minimum tax: IFSC units generally get a concessional minimum alternate tax rate, so the benefit is not fully clawed back through MAT/AMT.
- Practical implication: Section 147 is a cornerstone incentive that makes GIFT-IFSC one of the most tax-efficient places in India to run global financial operations. But it is strictly conditional — miss the approval, the separate books, or the CA report, and the deduction can be denied.
Because this is a specialised, high-value provision, always cross-check the exact current percentages and forms against the latest IFSCA circulars and the notified Income-tax Rules before filing, as figures may be refined by later notifications.
💡 Example
Example 1 — IFSC Unit (100% for 10 years): Zenith Fund Management IFSC Ltd. sets up in GIFT City and gets its IFSCA registration in FY 2026-27. In FY 2027-28 it earns ₹8 crore of eligible income from its approved fund-management business. Under Section 147, it can claim a 100% deduction of the ₹8 crore, so its taxable income from that activity is ₹0. It can repeat this for any 10 consecutive years within the 15-year window ending FY 2041-42 — potentially saving crores in tax over the decade.
Example 2 — Offshore Banking Unit (100% then 50%): An OBU of a scheduled bank in an SEZ earns ₹10 crore of eligible offshore income each year. For the first 5 years it deducts 100% (₹10 crore) — nil tax. In years 6 to 10 it deducts 50% (₹5 crore), so only ₹5 crore is taxed each year. At a 25% effective rate, the year-6 tax would be about ₹1.25 crore instead of ₹2.5 crore.
A relatable story: Meera, a CA, advises a Mumbai asset manager thinking of expanding overseas. She shows them that by opening an IFSC unit in GIFT City instead, their new global fund's profits could be 100% tax-free for a decade under Section 147 — provided they maintain separate books and file the CA report each year. The founder jokes that the toughest part isn't the tax law, it's remembering to file Form 10CCF on time. Meera's reply: "Miss the form, lose the holiday."
| Feature | Offshore Banking Unit (OBU) in SEZ | Unit of IFSC (e.g., GIFT City) |
|---|
| Deduction rate | 100% of eligible income | 100% of eligible income |
| Period at 100% | First 5 years | Any 10 consecutive years |
| Period at 50% | Next 5 years | Not applicable |
| Selection window | 10-year block from year of permission | 10 years chosen out of a 15-year window |
| Approval needed | Banking Regulation Act, 1949 | IFSCA Act, 2019 |
| CA report | Required (Form 10CCF / prescribed form) | Required (Form 10CCF / prescribed form) |
| Old-law equivalent | Section 80LA, Act 1961 | Section 80LA(1A), Act 1961 |
Related sections
Section 80LA (1961 Act) — Original deduction for OBUs & IFSC units Section 144 — Deductions for SEZ units (Chapter VIII) Section 200 — TDS obligations and IFSC relaxations Section 206 — Concessional/nil withholding for IFSC payments Concessional tax regime for new manufacturing companies Exemption for specified income of IFSC investment funds
Frequently asked questions
What income of an IFSC unit is tax-free under Section 147?
Only income from the specific business for which the unit received IFSCA approval — such as banking, fund management, insurance or aircraft/ship leasing — qualifies for the 100% deduction. Income from unrelated activities is fully taxable.
Is the IFSC deduction 100% for all 15 years?
No. It is 100% for any 10 consecutive years, but you choose those 10 years out of a 15-year window that starts from the year you obtain your permission or registration. The remaining years get no deduction.
How is an Offshore Banking Unit treated differently from an IFSC unit?
An OBU generally gets 100% deduction for the first 5 years and 50% for the next 5 years, whereas an IFSC unit gets a full 100% deduction for 10 consecutive years chosen from a 15-year window.
Do I need a Chartered Accountant's report to claim Section 147?
Yes. The deduction must be backed by a CA certificate (historically Form 10CCF under the 1961 Act, with a corresponding prescribed form under the 2025 rules) filed electronically with your return, along with proof of your regulatory approval.
Does Section 147 of the 2025 Act change the old Section 80LA benefit?
It essentially re-enacts Section 80LA of the 1961 Act with the same substance. The section number and drafting are new under the Income-tax Act, 2025 (effective 1 April 2026), but the deduction structure is carried forward.
Are there TDS benefits for IFSC units too?
Yes. To make the tax holiday meaningful, many payments to and from IFSC units enjoy relaxed or nil withholding tax, so funds are not locked up during the deduction years. Check the latest CBDT notifications for the exact list.
What happens if I miss filing the return or the CA report on time?
As a profit-linked deduction, timely filing and proper documentation are conditions of the claim. Missing the deadline or the CA report can lead to the deduction being disallowed, so compliance discipline is critical.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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