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Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Location of Business and Tax Incentives: SEZ and IFSC

Updated 11 October 2026 · Fact-checked

Location of business tax planning means choosing where to set up a unit so that you get the tax incentives the Income-tax Act, 2025 gives to that place. Key places are SEZs, IFSC units and Offshore Banking Units. For each, check eligibility, the deduction period, the conditions and the filing requirements.

Understand Location of Business and Tax Incentives

Tax law does not tax every place the same way. Parliament uses tax breaks to push business into chosen places, such as Special Economic Zones (SEZs) and International Financial Services Centres (IFSC). Tax planning on location means picking the place that is commercially sound and also gives a lawful tax benefit.

The Income-tax Act, 2025 carries these benefits in a few sections. Section 144 keeps the old section 10AA benefit alive for SEZ entrepreneurs, calculated as under section 10AA of the 1961 Act and for only the years that section would have allowed. Section 139 does the same for SEZ developers, by reference to section 80-IAB of the 1961 Act. Section 147 gives a 100% deduction on specified income of Offshore Banking Units (OBUs) in an SEZ and of IFSC units.

Section 88 deals with the cost of moving. If an industrial undertaking shifts from an urban area to an SEZ and transfers its old machinery, plant, building or land, the capital gain can be saved from tax to the extent you spend on new assets in the SEZ. The spending must be within one year before or three years after the transfer.

The benefits come with conditions. Section 147 needs an accountant's report and a copy of the permission or registration. For units starting on or after 1 April 2026, the unit must not be formed by splitting up, reconstruction, reorganisation or transfer of a business already in existence in India. So location planning cannot be done by just moving an old business into a new shell.

The syllabus also names backward areas. The official text supplied to you covers SEZ, OBU and IFSC. For backward-area undertakings, state the idea in general terms: incentives exist for them, so check the exact section and conditions in your study material before quoting.

Key rules to remember

Section 147(1): OBU and IFSC deduction
Deduction = 100% × eligible income under section 147(3)
For a scheduled bank or foreign bank with an OBU in an SEZ, or an IFSC unit.
Section 147(2): deduction period (from 1 April 2026)
OBU: 20 consecutive tax years. IFSC unit: 20 consecutive tax years out of 25, at the assessee's option
Earlier text gave 10 years (OBU) and 10 out of 15 years (IFSC). An OBU whose tenth year of section 80LA deduction ended on 31 March 2025 gets a further ten years from 1 April 2026.
Section 147(4): conditions
Accountant's report + copy of permission/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.
Section 147(5): new unit condition
Unit starting on or after 1 April 2026 must not arise from splitting up, reconstruction, reorganisation or transfer of an existing Indian business
Otherwise the deduction is not available.
Section 144: SEZ entrepreneur
Deduction as calculated under section 10AA of the 1961 Act, for only the years it would have allowed
Applies to an entrepreneur who is eligible as if the 1961 Act had not been repealed.
Section 139: SEZ developer
Deduction as calculated under section 80-IAB of the 1961 Act, for only the years it would have allowed
For SEZs notified on or after 1 April 2005.
Section 88: shifting to an SEZ
Taxable gain = capital gain − cost of new asset (if positive); if cost ≥ gain, nil
Purchase or construction within 1 year before or 3 years after transfer. Unused gain must be deposited under the notified scheme before the return due date.

How to solve Location of Business and Tax Incentives questions

Use this order for any case question on location-based incentives.

  1. 1Identify the type of assessee: SEZ entrepreneur, SEZ developer, OBU, IFSC unit, or an undertaking shifting to an SEZ.
  2. 2Pick the matching section: 144, 139, 147 or 88.
  3. 3Check eligibility facts: place, permission or registration, commencement date, and whether the unit came from splitting up or reconstruction of an existing business.
  4. 4Work out the benefit: the deduction percentage, the eligible income, and the number of years available.
  5. 5Check the compliance: accountant's report, permission copy, filing with the return, and deposit of unused capital gain where section 88 applies.
  6. 6Compute the numbers: deduction, taxable income, or taxable capital gain.
  7. 7Write the conclusion: state whether the benefit is available, its amount, and the one condition that could defeat it.

Quickest way: Four-question screen

When to use it: Use when a short case gives a lot of facts and you have little time.

  1. Which section applies to this assessee?
  2. What is the deduction and for how many years?
  3. Is any condition broken, such as a missing report or a unit formed from an existing business?
  4. What is the figure, and what is the one-line conclusion?

Common mistakes in Location of Business and Tax Incentives

  • Quoting the old 10-year period for OBU or IFSC units.

    Older notes and the earlier text of section 147(2) said ten years.

    Fix: Use the substituted text from 1 April 2026: 20 years, and for IFSC units 20 out of 25 years at the assessee's option.

  • Allowing the deduction on all income of the unit.

    Students read '100%' and stop.

    Fix: Apply it only to income listed in section 147(3), such as income of the OBU or approved business of the IFSC unit.

  • Ignoring the new-unit condition for units starting on or after 1 April 2026.

    Students look only at the place, not at how the unit was formed.

    Fix: Check whether the unit came from splitting up, reconstruction, reorganisation or transfer of an existing Indian business. If so, deny the deduction.

  • Treating section 144 or 139 as a fresh, independent deduction.

    The sections look self-contained.

    Fix: Remember they borrow the amount and the years from section 10AA and section 80-IAB of the 1961 Act, as if that Act had not been repealed.

  • Taxing the whole capital gain on shifting to an SEZ.

    Students forget section 88 when a business moves.

    Fix: Compare the cost of the new asset with the gain. Only the shortfall is taxed. If the cost is equal or more, no gain is charged.

  • Forgetting filing conditions.

    Focus is on the computation.

    Fix: Mention the accountant's report and permission copy for section 147, and the deposit proof for section 88.

Worked examples

Example 1

Sagar Bank Ltd, a scheduled bank, has an Offshore Banking Unit in an SEZ. The eligible income of the OBU for the tax year is ₹8,40,00,000. Its other business income is ₹3,00,00,000. Can it claim a deduction, and how much? What must it file?

Show the solution
  1. Section 147(1)(a) covers a scheduled bank with an OBU in an SEZ.
  2. The deduction is 100% of income of the nature in section 147(3), here the OBU income of ₹8,40,00,000.
  3. The other income of ₹3,00,00,000 is not OBU income, so it gets no deduction under this section.
  4. The deduction is 100% × ₹8,40,00,000 = ₹8,40,00,000.
  5. With the return, it must submit an accountant's report certifying the claim and a copy of the permission under section 23(1)(a) of the Banking Regulation Act, 1949.

Answer: Deduction of ₹8,40,00,000 is allowed on OBU income only. The ₹3,00,00,000 stays taxable. The accountant's report and permission copy must be filed with the return.

Example 2

Meera Engineering Ltd sells the land and building of its factory in an urban area for a capital gain of ₹90,00,000, to shift the undertaking to an SEZ. Within the allowed period it buys plant and land in the SEZ for ₹70,00,000. What is the taxable capital gain, and what is the cost position if it sells the new asset within three years?

Show the solution
  1. Section 88 applies because an industrial undertaking is shifting from an urban area to an SEZ and the purchase is within the allowed period.
  2. Compare the cost of the new asset with the gain: ₹70,00,000 is less than ₹90,00,000.
  3. As per section 88(1)(A)(I), the difference is charged: ₹90,00,000 − ₹70,00,000 = ₹20,00,000.
  4. The balance gain of ₹70,00,000 is not charged.
  5. If the new asset is transferred within three years, its cost for computing gain is reduced by the gain not charged, as per section 88(1)(B).

Answer: ₹20,00,000 is taxable as capital gain. If the new asset is sold within three years, its cost is reduced by ₹70,00,000.

Exam tips

  • Write the section number and the condition before the computation. Examiners reward provision, analysis, conclusion.
  • Always state the 1 April 2026 change in the deduction period and the new-unit condition.
  • For section 144 and 139, say clearly that the amount and the years follow the 1961 Act sections as if repealed.
  • End case answers with a firm conclusion and the compliance steps: report, permission copy, deposit.
  • Where a section is not in your notes, state the rule in words and avoid guessing the section number.

Practice questions from Tax Planning and Location of Business

Location of Business and Tax Incentives in other exams

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

Location of Business and Tax Incentives: frequently asked questions

Which sections of the Income-tax Act, 2025 cover SEZ and IFSC benefits?

Section 144 covers SEZ entrepreneurs and section 139 covers SEZ developers. Section 147 covers OBUs and IFSC units. Section 88 covers capital gains when an industrial undertaking shifts to an SEZ.

How long does the section 147 deduction last?

From 1 April 2026, an OBU gets 20 consecutive tax years. An IFSC unit gets 20 consecutive tax years out of 25, at the assessee's option. Earlier text gave 10 years and 10 out of 15 years.

Can an existing business be moved into an IFSC unit to claim the deduction?

Not for units that start on or after 1 April 2026. Section 147(5) denies the deduction if the unit is formed by splitting up, reconstruction, reorganisation or transfer of a business already in existence in India.

What documents are needed to claim the section 147 deduction?

You must submit, with the return, an accountant's report in the prescribed form and a copy of the permission under the Banking Regulation Act, 1949, or the permission or registration under the IFSCA Act, 2019.