Extension of Tax Deduction Period for IFSC Units and Rationalized 15% Tax Rate from FY 2026–27

 Extension of Deduction Period for IFSC Units and Rationalization of Tax Rate: A Major Boost for Global Financial Services

India’s ambition to become a global financial hub has taken a significant step forward with the proposed amendments relating to units operating in the International Financial Services Centres (IFSCs). The latest provisions focus on extending the tax deduction period and rationalizing the tax rate after the expiry of deductions, making IFSCs far more competitive on the global stage. These changes are especially relevant for businesses, offshore banking units (OBUs), and international investors planning long-term operations in India.

This article explains the existing provisions, the proposed amendments, and their overall impact on IFSC units.

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Background: Existing Tax Benefits for IFSC Units

Under Section 147 of the Income-tax provisions, units set up in an IFSC, including Offshore Banking Units (OBUs), are currently eligible for a 100% tax deduction on certain incomes. These incentives were introduced to attract global financial institutions and encourage high-value financial activity within India.

Current Structure of Deduction:

• IFSC Units:
  Eligible for a 100% deduction for 10 consecutive years out of a block of 15 years.

• Offshore Banking Units (OBUs):
  Eligible for a 100% deduction for 10 consecutive years.

While this framework has been beneficial, stakeholders have highlighted that the limited deduction window restricts long-term planning and reduces India’s competitiveness compared to other international financial hubs such as Singapore, Dubai, and London.

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Proposed Amendment: Extension of Deduction Period

To strengthen the attractiveness and competitiveness of IFSCs, the government has proposed a significant extension of the deduction period.

Key Changes Proposed:

• IFSC Units will now be eligible for:

  • 100% tax deduction for 20 consecutive years out of 25 years, instead of the existing 10 out of 15 years.

• Offshore Banking Units (OBUs) will also be eligible for:

  • 100% tax deduction for 20 consecutive years.

This extension effectively doubles the tax-free operational period, allowing businesses to plan investments, expansions, and capital deployment with greater certainty.

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Rationalization of Tax Rate After Deduction Period

In addition to extending the deduction period, the proposal also addresses taxation after the expiry of the deduction window.

New Tax Rate Post Deduction:

• Once the deduction period ends, the business income of IFSC units will be taxed at a concessional rate of 15%.

This rationalized tax rate is significantly lower than standard corporate tax rates, ensuring that IFSC units remain tax-efficient even after their deduction period expires. It creates a smooth transition from a tax-free phase to a low-tax phase, instead of a sudden tax burden.

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Effective Date and Applicability

The proposed amendments are scheduled to:

• Take effect from 1st April, 2026

• Apply to the Tax Year 2026-27 and all subsequent years

This provides businesses sufficient lead time to restructure operations, revise financial projections, and align long-term strategies with the new tax framework.

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Impact on Businesses and Investors

1. Enhanced Global Competitiveness

By extending the tax deduction period and offering a concessional post-deduction tax rate, India’s IFSCs become more attractive compared to competing global financial centres.

2. Long-Term Investment Stability

A 20-year deduction window allows institutions to recover initial setup costs, invest in infrastructure, and expand operations without immediate tax pressures.

3. Boost to Offshore Banking and Financial Services

OBUs, fintech firms, fund management entities, and capital market intermediaries are expected to benefit significantly, leading to higher employment and increased foreign exchange inflows.

4. Policy Certainty

Clear timelines and predictable tax treatment enhance investor confidence and encourage long-term commitments to Indian IFSCs.

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Conclusion

The extension of the deduction period for IFSC units and the rationalization of the tax rate represent a strategic policy reform aimed at positioning India as a global financial powerhouse. By offering extended tax incentives and a competitive post-deduction tax regime, the government has addressed long-standing industry concerns while reinforcing its commitment to IFSC development.

Effective from 1 April 2026, these changes are expected to drive sustained growth, attract global financial institutions, and strengthen India’s role in international finance.