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Direct Tax Laws and International Taxation · Different Aspects of Tax Planning

Tax Planning for Special Zones and Incentives

Updated 11 October 2026 · Fact-checked

Tax planning for special zones means choosing a location, entity and business structure so that you can claim the deductions the Income-tax Act, 2025 gives to SEZ units (section 144) and IFSC or Offshore Banking Units (section 147). Check eligibility, deduction period, conditions and compliance, then compute the saving and recommend.

Understand Tax Planning for Special Zones and Incentives

Governments use tax incentives to pull investment into chosen places or activities. Special Economic Zones, International Financial Services Centres, infrastructure, start-ups and exports are common examples. Tax planning here is lawful. You pick the option the law offers and meet every condition.

Under the Income-tax Act, 2025, section 144 covers newly established units in SEZs. The assessee must be an entrepreneur under the SEZ Act, 2005, who begins to manufacture or produce articles or things, or provide services. The deduction is on profits and gains derived from the business. Two conditions apply. The amount is calculated as per section 10AA of the Income-tax Act, 1961. The deduction is allowed only for the tax years that would have been allowed under that section, as if the 1961 Act had not been repealed. So the 2025 Act borrows the 1961 formula and period. Learn the idea: the SEZ deduction is a legacy-linked incentive, not a fresh one.

Section 147 covers Offshore Banking Units (OBUs) in an SEZ and units of an IFSC. The deduction is 100% of the qualifying income. It applies to a scheduled bank or a foreign bank with an OBU in an SEZ, and to an IFSC unit. Qualifying income includes income from the OBU, income from banking business activities with SEZ undertakings or SEZ developers, approved business activities of an IFSC unit, and transfer of an aircraft or ship leased by such a unit if the unit commenced operations by 31 March 2030.

The period was extended from 1 April 2026. For an OBU, the deduction runs for twenty consecutive tax years from the relevant tax year. A further ten years is allowed from the tax year beginning 1 April 2026 where the tenth year of the old section 80LA deduction ended on 31 March 2025. For an IFSC unit, it is twenty consecutive tax years out of twenty-five, at the assessee's option. Earlier it was ten out of fifteen. Units starting on or after 1 April 2026 get the deduction only if they are not formed by splitting up, reconstruction, reorganisation or transfer of an existing Indian business.

Other incentives matter for planning too. Section 32 lists other business deductions, such as a special reserve deduction for specified financial entities. Under section 278(2), a claim for export incentives is income of the tax year in which reasonable certainty of realisation is achieved. For backward areas, start-ups and infrastructure, the official text supplied here does not give the rules, so use your study material for those and check conditions each time.

Key rules to remember

SEZ unit deduction (section 144)
Deduction = amount calculated as per section 10AA of the 1961 Act, for the years that section would have allowed
Entrepreneur under the SEZ Act, 2005 who begins to manufacture, produce or provide services. Not a fresh formula.
OBU and IFSC deduction (section 147(1))
Deduction = 100% × qualifying income under section 147(3)
Assessee: scheduled bank or foreign bank with an OBU in an SEZ, or an IFSC unit.
Period for OBU (section 147(2)(a))
20 consecutive tax years from the relevant tax year
Plus 10 more years from 1 April 2026 if the tenth year of section 80LA deduction ended on 31 March 2025.
Period for IFSC unit (section 147(2)(b))
20 consecutive tax years out of 25 years from the relevant tax year, at the assessee's option
Earlier rule was 10 out of 15 years.
Filing conditions (section 147(4))
Accountant's report in prescribed form + copy of permission or registration, filed with the return
Permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the IFSCA Act, 2019.
New unit anti-splitting rule (section 147(5))
Unit starting on or after 1 April 2026 must not be formed by splitting up, reconstruction, reorganisation or transfer of an existing Indian business
Otherwise no deduction.
Export incentive timing (section 278(2))
Taxable in the tax year when reasonable certainty of realisation is achieved
Applies to escalation claims and export incentives.

How to solve Tax Planning for Special Zones and Incentives questions

Use this order for any question on incentives for special zones. It keeps your answer structured and shows the examiner a recommendation.

  1. 1Identify the assessee and the activity: SEZ manufacturer or service provider, OBU, IFSC unit, exporter, or other.
  2. 2Name the section that applies: 144 for SEZ units, 147 for OBU and IFSC units.
  3. 3Check eligibility and conditions: start date, entity type, and for new units after 1 April 2026 the anti-splitting rule.
  4. 4Find the qualifying income. Exclude income that does not fit section 147(3).
  5. 5Work out the deduction and the years it is available. For SEZ units, apply the section 10AA method as the question gives it.
  6. 6Check compliance: accountant's report and permission copy filed with the return under section 147(4).
  7. 7Compute tax with and without the incentive, and state the saving.
  8. 8Write a clear recommendation, including risks such as loss of the deduction on a failed condition.

Quickest way: Four-question screen

When to use it: Use it for MCQs and short case questions where time is tight.

  1. Which zone or unit is it: SEZ unit (section 144) or OBU or IFSC unit (section 147)?
  2. Is the income of the kind listed in the section? If not, no deduction.
  3. Is the year within the allowed period? Use 20 years for OBU, 20 out of 25 for IFSC.
  4. Are the report and permission papers filed, and is a post-April 2026 unit free of splitting up or reconstruction?

Common mistakes in Tax Planning for Special Zones and Incentives

  • Writing that section 144 gives a self-contained deduction formula.

    Students remember the 1961 Act's section 10AA and assume the new Act repeats it.

    Fix: State that section 144 gives the deduction as calculated under section 10AA and only for the years that section would have allowed.

  • Giving the old 10-year or 10-out-of-15-year periods for OBU and IFSC units.

    Older notes and books still carry the pre-2026 rule.

    Fix: Use 20 years for OBUs and 20 out of 25 years for IFSC units, as substituted from 1 April 2026.

  • Allowing 100% deduction on all income of an IFSC unit.

    Students read '100%' and skip the qualifying income test.

    Fix: Apply 100% only to income listed in section 147(3), such as approved business activities of the unit.

  • Ignoring the accountant's report and permission copy.

    Computation questions feel like arithmetic only.

    Fix: Mention section 147(4) conditions. The deduction is allowed only if these are submitted with the return.

  • Taxing an export incentive when cash is received.

    Cash-basis thinking.

    Fix: Under section 278(2), tax it in the year when reasonable certainty of realisation is achieved.

  • Recommending that a business be split into a new IFSC unit to claim the deduction.

    Students see only the tax saving.

    Fix: Remember section 147(5): units commencing on or after 1 April 2026 formed by splitting up, reconstruction, reorganisation or transfer of an existing Indian business get no deduction.

Worked examples

Example 1

Sunrise Bank Ltd, a scheduled bank, set up an Offshore Banking Unit in an SEZ and got Banking Regulation Act permission in tax year 2024-25. In 2026-27 the OBU earned qualifying income of ₹8,00,000 under section 147(3), and the bank's other income is ₹50,00,000. Compute the deduction for 2026-27 and state the conditions.

Show the solution
  1. The bank is a scheduled bank with an OBU in an SEZ, so section 147(1)(a) applies.
  2. The relevant tax year is the year of permission, 2024-25. 2026-27 falls within the twenty consecutive years from it.
  3. Deduction = 100% × ₹8,00,000 = ₹8,00,000.
  4. The other income of ₹50,00,000 is not qualifying income, so it gets no deduction under this section.
  5. Condition: file with the return an accountant's report in the prescribed form and a copy of the permission under section 23(1)(a) of the Banking Regulation Act, 1949.

Answer: Deduction for 2026-27 is ₹8,00,000, only on the OBU's qualifying income, and subject to filing the accountant's report and the permission copy.

Example 2

Ganga Ventures (India) Ltd plans to start a unit in an IFSC from 1 October 2026. Option 1: transfer part of its existing Mumbai financing business to the new unit. Option 2: begin an entirely new approved business with fresh capital. Advise on the tax position under section 147.

Show the solution
  1. An IFSC unit qualifies under section 147(1)(b), with 100% deduction on income under section 147(3)(c), if the activities are approved.
  2. The unit commences on or after 1 April 2026, so section 147(5) applies.
  3. Option 1 forms the unit by transferring a business already in existence in India. Section 147(5) denies the deduction.
  4. Option 2 is a genuinely new business, so the anti-splitting bar does not apply.
  5. Under Option 2, the period is twenty consecutive tax years out of twenty-five from the relevant tax year, at the company's option.
  6. The company must file the accountant's report and a copy of the permission or registration under the IFSCA Act, 2019 with its return.

Answer: Recommend Option 2. Option 1 loses the deduction under section 147(5). Option 2 can claim 100% of qualifying income for twenty years out of twenty-five, subject to the filing conditions.

Exam tips

  • Write section numbers exactly: 144 for SEZ units, 147 for OBU and IFSC units, 278(2) for export incentive timing.
  • Use the 2026 changes in your answer: 20 years for OBU, 20 out of 25 for IFSC, and the anti-splitting rule for units starting on or after 1 April 2026.
  • In case questions, always test the type of income before computing the deduction.
  • End with a recommendation and mention the compliance steps. Both earn marks in application answers.
  • Do not quote rates or periods for backward areas, start-ups or infrastructure unless the question supplies them or you are sure of them.

Practice questions from Different Aspects of Tax Planning

Tax Planning for Special Zones and Incentives in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Tax Planning for Special Zones and Incentives: frequently asked questions

What does section 144 of the Income-tax Act, 2025 cover?

It covers newly established units in SEZs run by an entrepreneur under the SEZ Act, 2005. The deduction is calculated as per section 10AA of the 1961 Act. It is allowed only for the tax years that section would have allowed.

How long can an IFSC unit claim the deduction under section 147?

Twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the assessee's option. This replaced the earlier ten out of fifteen years from 1 April 2026.

What must be filed to claim the section 147 deduction?

You must file with the return of income an accountant's report in the prescribed form. You must also file a copy of the permission under section 23(1)(a) of the Banking Regulation Act, 1949, or the permission or registration under the IFSCA Act, 2019.

When is an export incentive taxed?

Under section 278(2), it is income of the tax year in which reasonable certainty of its realisation is achieved. It is not necessarily the year of receipt.