GIFT City IFSC Tax Regime: The Legal Framework

GIFT City’s tax position is usually described as a “tax holiday,” but in law it is a set of specific statutory provisions, each with conditions – and from 1 April 2026 they sit in a new code. The headline relief, the former section 80LA of the Income-tax Act 1961, is now section 147 of the Income-tax Act 2025: a 100% deduction of an IFSC unit’s eligible income across an optional multi-year holiday window that successive Finance Acts have progressively extended, with income outside the holiday taxed at a concessional rate. Around it sit exemptions for non-residents and specified funds transacting on IFSC exchanges, a 9% minimum-tax floor, concessional withholding, SEZ-based GST treatment, and – as limits – the General Anti-Avoidance Rule, the treaty principal-purpose test and substance requirements. This page sets out the regime as a matter of law; it is not tax-planning advice, and the figures should be confirmed at the time of use, as the IFSC rules change continually.

The regime at a glance

• Governing code: Income-tax Act 2025 (in force 1 April 2026, replacing the 1961 Act)
• Headline deduction: s.147 (the former s.80LA) – 100% of eligible income across an optional, progressively-extended multi-year holiday window
• Post-holiday income: a concessional rate (confirm the figure in force); minimum tax (MAT/AMT) 9% of book profit, unless the concessional 17.16%/25.17% regime is chosen
• Non-resident reliefs: Exemptions for specified funds and non-residents on IFSC-exchange transactions in foreign currency
• Limits: GAAR (Chapter X-A), the MLI principal-purpose test, substance and beneficial ownership
• Scope: The regime as a matter of law – not tax-planning advice

1. The statutory architecture – and why the section numbers changed in 2026

The GIFT IFSC tax regime is not a single law but a layering of three. The Special Economic Zones Act 2005 enables the IFSC and treats it, for limited purposes, as outside India’s customs territory. The IFSCA Act 2019 created the unified regulator. And the tax reliefs themselves sit in the income-tax code – which, with effect from 1 April 2026 (Tax Year 2026–27), is the Income-tax Act 2025, a re-codification that replaced the Income-tax Act 1961 and reduced it from over seven hundred sections to a few hundred.

For GIFT, the practical effect of the new Act is renumbering rather than a change of policy: the provision practitioners knew as section 80LA of the 1961 Act is now section 147 of the 2025 Act, and the surrounding exemptions carry across in substance. Because the change is recent and most existing commentary still cites the old numbers, this page gives both. Everything below states the position current to mid-2026; the Finance Acts and the IFSCA’s own regulations move continually, so the specific figures and conditions should be verified at the time of use.

2. The headline deduction: section 147 (formerly section 80LA)

The central relief is a profit-linked deduction. Under section 147 of the Income-tax Act 2025 (the former section 80LA), a unit in an IFSC with specified income may claim a 100% deduction of that income across an optional multi-year holiday window beginning with the year in which it obtained its permission or registration under the Banking Regulation Act 1949, the SEBI Act 1992 or the IFSCA Act 2019. The trajectory is plainly expansionary: the relief began as ten consecutive years out of fifteen and has been progressively lengthened to give long-horizon investors a longer runway of certainty, with the precise span in force to be confirmed against the current Act when relied upon.

Two legal points are easy to miss. First, the relief is a deduction of specified business income, not a blanket exemption of the entity – income outside the eligible categories is taxed normally. Second, once the holiday ends (or for income that never qualified), an IFSC unit or offshore banking unit is taxed at a concessional rate (plus surcharge and cess) rather than the ordinary corporate rate, the current figure to be confirmed at the time. The deduction is, in short, valuable but bounded – and every boundary is a condition that can be tested.

3. Eligible income, foreign-exchange receipt and the permission tests

The deduction turns on conditions, and conditions are the legal heart of the regime. The income must arise from the approved IFSC activities for which the unit holds IFSCA permission; the unit must in fact hold that permission or registration; and the claim must be supported by the prescribed accountant’s certificate. For many of the surrounding reliefs, the income must also be received in convertible foreign currency and arise from transactions on a recognised IFSC exchange.

The legal consequence of a failed condition is the point a reader most needs to understand: if eligibility, the activity, the certification or the foreign-currency requirement is not met, the deduction or exemption is simply not available for that income, which falls to be taxed under the ordinary rules – and a relief claimed but later disallowed becomes a dispute (Section 8). This is why the conditions, not the headline rate, are where careful structuring and good records matter.

4. The non-resident and specified-fund exemptions – who they bind, and who they do not

Around the core deduction sits a set of exemptions, and their defining legal feature is that they are tied to the investor’s status and the instrument, not to GIFT as a place. The former sections 10(4D), 10(4E) and 10(4F) and section 47(viiab) of the 1961 Act (carried into the 2025 Act) exempt, broadly: the specified income of a specified fund – a Category III AIF in an IFSC, certain schemes, and the investment division of an offshore banking unit – to the extent attributable to units held by non-residents; a non-resident’s income from non-deliverable forwards, offshore derivative instruments and OTC derivatives entered into with an IFSC unit; a non-resident’s royalty or interest on the lease of an aircraft or ship from an IFSC unit; and the transfer by a non-resident, on a recognised IFSC exchange and for foreign-currency consideration, of specified securities (which is not regarded as a transfer at all).

The party-dependent nuance must be stated plainly, because it is the most common error: these are non-resident and specified-fund reliefs. A resident investor, or income outside the listed instruments, exchanges and foreign-currency conditions, is taxed under the ordinary rules. The exemption attaches to the combination of instrument + investor status + on-exchange + foreign currency – not to the fact that a structure sits in GIFT. The relevant funds are now those regulated under the IFSCA (Fund Management) Regulations 2025, and several of these reliefs carry a sunset requiring the unit to commence operations on or before 31 March 2030.

5. The baseline charge: minimum tax, the concessional rate and withholding

Even within the holiday, a floor applies. Minimum Alternate Tax (for companies) and Alternate Minimum Tax (for others) apply at a concessional 9% of book profit to an IFSC unit deriving its income solely in convertible foreign exchange. A legal nuance worth stating: MAT does not apply to an IFSC company that has opted into the concessional corporate-tax regime (the 17.16% / 25.17% effective rates), and no new MAT credit accrues from 1 April 2026.

On withholding, the regime is deliberately light: there is no withholding on specified payments to or from a unit that has opted into the section 147 holiday; interest paid to a non-resident on monies lent to IFSC units is not taxable, and interest on IFSC-listed long-term or rupee-denominated bonds is taxed at a concessional 4% (bonds issued before 1 July 2023) or 9% (on or after); and dividend paid by an IFSC unit to a non-resident is taxable at 10% (plus surcharge and cess). These are the rates in law; how they apply to a given flow is a matter for tax counsel.

6. Indirect and state taxes as a matter of law

An IFSC unit is, for indirect-tax purposes, an SEZ unit, and the treatment follows from that. Supplies to an IFSC unit for its authorised operations are zero-rated under section 16 of the IGST Act 2017 – the supplier either supplies under a letter of undertaking or bond, or pays and claims a refund – with the zero-rating tied, since October 2023, expressly to authorised operations. Supplies by an IFSC unit into the domestic tariff area are treated as imports in the recipient’s hands. Fund-management services to IFSC funds are exempt.

On-exchange transactions have their own legal treatment: trades in specified securities on a recognised IFSC exchange, in foreign currency, are outside securities transaction tax, commodities transaction tax and stamp duty. Gujarat separately exempts stamp duty on instruments for transactions routed through IFSC exchanges and depositories. As with the direct-tax reliefs, each of these is conditional and exchange-specific rather than a blanket exemption of everything an IFSC unit does.

7. The legal limits: GAAR, the principal-purpose test, substance and beneficial ownership

The reliefs are not unconditional gifts; the law builds in anti-avoidance limits, and these are where legal risk concentrates. Under the General Anti-Avoidance Rule (Chapter X-A, the former sections 95–102, carried into the 2025 Act), the revenue can declare an arrangement an impermissible avoidance arrangement – and re-determine the tax – where its main purpose is a tax benefit and it is tainted by, among other things, a lack of commercial substance. An IFSC structure’s reliefs can, in principle, be denied or unwound on that basis.

At treaty level, India’s adoption of the Multilateral Instrument makes the principal-purpose test the default anti-abuse rule: a treaty benefit is denied if obtaining it was one of the principal purposes of an arrangement, unless granting it accords with the treaty’s object and purpose (the position the CBDT clarified in a January 2025 circular). Running through both is the requirement of genuine substance and beneficial ownership: a thinly-staffed conduit invites challenge, while documented commercial substance is the answer to it. For the legal adviser, the lesson is that the reliefs are earned and defended, not merely claimed.

8. Treaty access, the FEMA interplay, and how a tax position is assessed

An IFSC entity is, for tax purposes, Indian-resident (incorporated in India), and accesses India’s tax-treaty network as a resident – subject, for inbound income, to sections 90 and 90A, a Tax Residence Certificate and Form 10F, the principal-purpose test, beneficial ownership and GAAR. The India–UAE treaty is the live corridor instrument for the firm’s UAE-facing clients. The FEMA interplay is a point of frequent confusion: the IFSC is deemed “non-resident” for foreign-exchange purposes, but that characterisation is for exchange control and does not change the unit’s residence or treatment for income tax.

When a position is challenged, it is resolved through the ordinary income-tax machinery: the assessing officer’s order is taken to the Commissioner (Appeals) or the faceless appellate authority – or, for transfer-pricing and eligible-assessee cases, through a draft order and the Dispute Resolution Panel under section 144C – then the Income Tax Appellate Tribunal, and on a substantial question of law the High Court and Supreme Court, with Advance Pricing Agreements and the Mutual Agreement Procedure available for cross-border pricing and treaty disputes. We cover that contentious dimension in detail in our note on dispute resolution for GIFT City and IFSC investors; the point for this page is simply that a tax position in GIFT is only as good as its ability to survive that process.

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