TDS Exemption for IFSC Units: Key Details and Benefits Explained

TDS Relief for IFSC Units from July 1, 2025: What It Means and How to Make It Work

Starting July 1, 2025, businesses operating out of International Financial Services Centres (IFSCs)—especially those in GIFT City—have been given a significant breather on tax compliance. Thanks to Notification No. 67/2025 issued by the Central Board of Direct Taxes (CBDT), several payments made to eligible IFSC units will now be exempt from Tax Deducted at Source (TDS).

Who Gets the Benefit?

This TDS exemption applies strictly to units set up and approved under the Special Economic Zone (SEZ) framework. If you're running a qualifying business from an IFSC like GIFT City, you're potentially eligible—but only for ten consecutive assessment years, and only if you follow the correct compliance path.

What Types of Payments Are Covered?

The notification clearly outlines a broad range of payment types across various business categories. Below is a simplified breakdown of what’s exempt:

IFSC Business Type	Exempt Payments
BATF (Bookkeeping, Accounting, Taxation & Financial Crime)	Consulting, advisory, and professional service fees
Broker Dealers on Recognised Stock Exchanges	Commissions and incentive payments
Finance & Leasing Companies	Interest on leasing, hire charges, freight-related interest
Fund Managers	Portfolio/investment advisory fees, technical fees, interest, penalties
Clearing Corporations & Depositories	Contractual/professional fees, data center rent, penalties, interest
Other SEBI-Recognised Exchanges/Units	Professional/technical service fees, interest income, data center rent
Other Approved IFSC Units	Government-notified payments

Key Compliance Steps for IFSC Units

To actually enjoy the exemption, IFSC units must take the following steps:

File Form No. 1: This is a combined declaration and statement to inform every payer of your chosen ten-year window for claiming Section 80LA benefits and the TDS waiver.
Do this yearly: The form isn’t a one-time thing. You have to file and verify it annually.
Stick to approved business: Only income from SEZ-approved IFSC activities qualifies. Diversifying outside that scope? The exemption won’t apply.

What Payers Must Do

If you're making payments to an IFSC unit:

Don’t deduct TDS after receiving Form No. 1, but only within the exemption window.
Still report it: Even exempted payments must be included in your quarterly TDS statements (under Section 200(3), Rule 31A).
Keep records: Save a copy of Form No. 1 for future audits or scrutiny. If you don’t receive the form or if the business isn’t eligible, the default TDS rules will kick in.

What This Means for the Ecosystem

This exemption places IFSC units on par with exporters—allowing earnings from international financial activity to flow through without tax deduction friction.

It’s a deliberate attempt to promote tax neutrality, strengthen GIFT City’s positioning as an international financial services gateway, and support ease of doing business for institutions dealing in global financial products.

But there’s a caveat: once the 10-year period ends—or if the unit strays outside its approved business domain—normal TDS rules resume. Also, any slip in the declaration and reporting process means the exemption is forfeited.

Snapshot Summary: TDS Exemption for IFSC Units

Condition	Requirement
IFSC Unit Action	File Form No. 1 every year for the chosen 10-year block
Payer’s Responsibility	Don’t deduct TDS but report exempt payments in TDS filings
Covered Payments	Interest, rent, advisory/technical/professional fees, commissions, penalties
Validity	10 consecutive assessment years (as per Section 80LA)

Final Word

This exemption is more than just a tax tweak—it reflects India’s larger ambition to compete globally in finance, by creating a smoother, smarter compliance regime for IFSCs. If both payers and IFSC units stay on top of their paperwork, this could be a game-changer for how capital flows through India's financial zones