CBDT Exempts TDS on Interest, Dividend, and Commission Payments to Eligible IFSC Units in India

In a recent notification, India’s CBDT has exempted specified payments to eligible IFSC units from TDS. Learn about eligibility, compliance requirements, and business implications.

The Central Board of Direct Taxes (CBDT) has introduced major tax compliance relief by exempting specified payments made to eligible International Financial Services Centre (IFSC) units from Tax Deducted at Source (TDS), subject to prescribed conditions.

Through Notification S.O. 3743(E), issued on July 10, 2026, the central government, exercising its powers under Section 400(1) read with Section 147 of the Income-tax Act, 2025, has exempted specified categories of payments to eligible IFSC units from TDS, subject to prescribed eligibility and compliance requirements.

Although the government issued the notification on July 10, 2026, it has given it retrospective effect from April 1, 2026.

What is the CBDT notification about?

Generally, a person making payments such as interest, professional fees, commission, dividend, or brokerage is required to deduct TDS before making the payment.

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The new notification creates an exception for specified payments made to eligible IFSC units, reducing withholding tax obligations where the prescribed conditions are fulfilled.

The measure is expected to improve cash flow for eligible IFSC businesses, reduce refund claims arising from excess tax withholding, and support the central government’s broader goal of strengthening India’s IFSC ecosystem, particularly GIFT City.

Legal authority and scope of applicability

The notification has been issued under Section 400(1) read with Section 147 of the Income-tax Act, 2025. Section 147 provides a tax incentive for eligible IFSC units by allowing them to claim the prescribed deduction for 20 consecutive tax years. To complement this benefit, the notification relieves payers from deducting TDS on specified payments made to eligible IFSC units during the tax years for which the deduction is claimed, subject to the prescribed conditions.

The exemption applies only to eligible units operating in an International Financial Services Centre.

It must be noted that only IFSC units registered under the relevant IFSCA regulations or circulars qualify for this tax relief.

Conditions for claiming the TDS exemption

The exemption is not automatic. Both the IFSC unit and the payer must comply with the documentation and reporting requirements prescribed under the notification.

Form 1(N) declaration by the IFSC unit

The IFSC unit (payee) must furnish a Statement-cum-Declaration in Form No. 1(N) to the payer before claiming the exemption.

The declaration includes:

• PAN
• Name and address of the IFSC unit
• Contact details
• Tax year
• Registration or approval details
• Authority granting registration
• Registration reference number and date
• The period for which the deduction under Section 147 has been opted
• Initial tax year for claiming the deduction
• Declaration of eligibility
• Verification by an authorized signatory

The IFSC unit must furnish and verify Form 1(N) for each tax year within the selected 20-year deduction period.

Obligations of the payer

After receiving Form 1(N), the payer is not required to deduct TDS on eligible payments made thereafter. Additionally, the payer must report all such payments in the prescribed TDS statement under Section 397(3)(b) read with Rule 219 of the Income-tax Rules, 2026.

20 consecutive tax years

One of the most important aspects of the notification is the interaction with Section 147.

An eligible IFSC unit can choose 20 consecutive tax years for claiming the deduction. The no-TDS benefit is available only during those opted-in years.

Outside that period the notification does not apply, and the payer must deduct TDS as per the normal provisions.

What this means for foreign investors and businesses in India

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The notification reduces the cost of doing business through India’s IFSC by removing the requirement to deduct TDS on specified payments to eligible IFSC units. For multinational enterprises, this translates into improved cash flow, fewer TDS refund claims, lower compliance and administrative costs, and more efficient cross-border financing and financial service transactions. Combined with the existing tax incentives available to qualifying IFSC units, the measure further strengthens the commercial case for locating regional treasury, fund management, financing, and investment activities in GIFT City.

A well-executed audit in India is crucial to ensure compliance with local regulations, verify financial accuracy, and identify risks, while a clean, structured audit process helps businesses stay ahead and gain clear visibility into operations.

Lalitha Rao

Manager

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