Income Tax 2025

Appearance

Deductions for income of Offshore Banking Units and Units of International Financial Services Centre. ​

147(1) ​

Where the following assessee has any income of the nature referred to in sub-section (3), there shall be allowed a deduction equal to 100% of such income:—

  • (a) a scheduled bank, or a bank incorporated under the laws of a country outside India, having an Offshore Banking Unit in a Special Economic Zone; or
  • (b) a unit of an International Financial Services Centre.

147(2) ​

The deduction shall be allowed––

  • (a) for ten consecutive tax years beginning from the relevant tax year in the case of an entity mentioned in sub-section (1)(a);
  • (b) for ten consecutive tax years within fifteen years beginning from the relevant tax year, at the option of an assessee, in the case of an entity mentioned in sub-section (1)(b).

147(3) ​

The income referred to in sub-section (3) shall be the income from—

  • (a) an Offshore Banking Unit located in a Special Economic Zone; or
  • (b) the business activities referred to in section 6(1) of the Banking Regulation Act, 1949, with undertakings in a Special Economic Zone or entities that develop, develop and operate, or develop, operate and maintain Special Economic Zone; or
  • (c) the approved business activities of any Unit of an International Financial Services Centre set up in a Special Economic Zone; or
  • (d) transfer of an asset being, an aircraft or a ship, leased by a unit referred to in clause (c) if such unit commenced its business operations by 31st March, 2030.

147(4) ​

The deduction under this section shall be allowed only if the assessee submits along with the return of income––

  • (a) a report in the form as prescribed, from an accountant certifying the correctness of claim of deduction; and
  • (b) a copy of the–– (i) permission obtained under section 23(1)(a) of the Banking Regulation Act, 1949; or (ii) permission or registration obtained under the International Financial Services Centres Authority Act, 2019.

147(5) ​

In this section,—

  • (a) “relevant tax year” shall be,— (i) in case of an entity mentioned in sub-section (1)(a), the tax year in which permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the Securities and Exchange Board of India Act, 1992 or any other relevant law was obtained; or (ii) in case of an entity mentioned in sub-section (1)(b), the tax year in which permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the Securities and Exchange Board of India Act, 1992, or permission or registration under the International Financial Services Centre Authority Act, 2019 was obtained;
  • (b) “Unit” shall have the same meaning as assigned to it in section 2(zc) of the Special Economic Zones Act, 2005;
  • (c) “aircraft” and “ship” shall have the meanings respectively assigned to them in Schedule VI Note 3.
Explanation

Section Summary: ​

Section 147 of the new income tax law provides a 100% tax deduction on specific types of income earned by Offshore Banking Units (OBUs) located in Special Economic Zones (SEZs) and Units of International Financial Services Centres (IFSCs). This deduction is aimed at promoting financial services in SEZs and IFSCs by offering significant tax relief to eligible entities.

Key Changes: ​

  1. 100% Deduction on Income: The new law allows a full deduction (100%) on income derived from OBUs and IFSC units, which was not explicitly provided under the previous tax regime.
  2. Duration of Deduction:
    • For OBUs: The deduction is available for 10 consecutive tax years starting from the relevant tax year.
    • For IFSC units: The deduction is available for 10 consecutive tax years within a 15-year window, giving flexibility to choose the start year.
  3. Expanded Scope of Income: The section now includes income from leasing of aircraft or ships by IFSC units, provided the unit commenced operations by 31st March 2030.

Practical Implications: ​

  1. For Scheduled Banks and Foreign Banks with OBUs:
    • Banks operating OBUs in SEZs can claim a 100% deduction on income from these units for 10 consecutive years.
    • This incentivizes banks to expand their offshore operations in SEZs.
  2. For IFSC Units:
    • Units in IFSCs can claim a 100% deduction on income from approved business activities, including leasing of aircraft or ships.
    • The flexibility to choose the 10-year window within 15 years allows strategic tax planning.
  3. Compliance Requirements:
    • Entities must submit a certified report from an accountant and provide proof of permissions/registrations under relevant laws (e.g., Banking Regulation Act, IFSC Authority Act).

Critical Concepts: ​

  1. Relevant Tax Year:
    • For OBUs: The year in which the entity obtained permission under the Banking Regulation Act or other relevant laws.
    • For IFSC units: The year in which the entity obtained permission or registration under the IFSC Authority Act or other relevant laws.
  2. Approved Business Activities:
    • These include activities approved under the IFSC Authority Act, such as financial services, leasing, and other specified operations.
  3. Interaction with Other Laws:
    • The section aligns with the Banking Regulation Act, 1949, and the IFSC Authority Act, 2019, ensuring compliance with regulatory frameworks.

Compliance Steps: ​

  1. Documentation:
    • Obtain and maintain proof of permissions/registrations under the Banking Regulation Act or IFSC Authority Act.
  2. Reporting:
    • Submit a certified report from an accountant along with the income tax return, verifying the correctness of the deduction claim.
    • Include copies of permissions/registrations as required.
  3. Record-Keeping:
    • Maintain detailed records of income derived from OBUs or IFSC units to substantiate the deduction claim.

Examples: ​

  1. Scenario for an OBU:

    • A scheduled bank operates an Offshore Banking Unit in an SEZ. In the relevant tax year, the OBU earns ₹10 crore from banking activities in the SEZ.
    • The bank can claim a 100% deduction on ₹10 crore, reducing its taxable income to zero for that year. This deduction is available for 10 consecutive years.

  2. Scenario for an IFSC Unit:

    • An IFSC unit in an SEZ earns ₹5 crore from leasing aircraft and ₹3 crore from other approved financial activities in the relevant tax year.
    • The unit can claim a 100% deduction on ₹8 crore. It can choose any 10-year period within 15 years to avail this benefit, allowing flexibility in tax planning.

This section provides significant tax relief to entities operating in SEZs and IFSCs, encouraging growth in these sectors while ensuring compliance with regulatory requirements.