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.

India has exempted specified payments made to eligible units operating in the International Financial Services Centre (IFSC) at GIFT City, Gujarat, from tax deduction at source (TDS).

The exemption may reduce withholding-related cash-flow constraints for qualifying banking units, finance companies, finance units, fund management entities, insurance intermediaries, and broker dealers. For US and European businesses using India for regional treasury, financing, investment management, insurance, or capital market activities, the measure strengthens the commercial attractiveness of operating through GIFT City.

The exemption is subject to eligible IFSC units, annual declarations, and payer reporting requirements. Businesses should therefore confirm that both the recipient and the payment category qualify before applying for the exemption

What is the CBDT notification about?

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Through Notification S.O. 3743(E), dated July 10, 2026, India’s Central Board of Direct Taxes (CBDT) has exempted specified payments made to eligible IFSC units from TDS. The exemption applies only to the categories of payments and IFSC units specified in the notification and is subject to prescribed conditions.

The notification applies retrospectively from April 1, 2026. 

Under India’s withholding tax regime, businesses making certain payments, such as interest, dividends, commissions, brokerage, and professional fees, are generally required to deduct tax before remitting the payment to the recipient. The notification removes this obligation for specified payments made to eligible IFSC units, provided both the payer and the recipient satisfy the prescribed eligibility, declaration, and reporting requirements.

India’s new IFSC TDS exemption allows payers to make specified interest, dividend, commission, brokerage, advisory, and professional-fee payments to qualifying IFSC units without withholding tax. The exemption applies only during the tax years for which the IFSC unit claims its deduction under Section 147 of the Income-tax Act, 2025.

Why does the exemption matter to US and European businesses? 

Withholding tax can create a timing mismatch for financial service providers. Tax is deducted when income is paid, while the recipient may need to claim a deduction, credit, or refund through a subsequent tax filing. By eliminating TDS on specified qualifying payments, the notification can reduce these cash-flow and compliance inefficiencies for eligible IFSC units.

Removing TDS from qualifying payments may provide several commercial benefits, including:

• Improved cash flow for eligible IFSC entities
• Fewer tax refund claims
• Reduced administrative work for payers and recipients
• More efficient intercompany and third-party financing arrangements
• Lower friction in paying financial, advisory, brokerage, insurance, and fund-management fees
• Greater certainty when structuring qualifying transactions through GIFT City

The exemption may be particularly relevant to multinational groups evaluating GIFT City for regional treasury functions, foreign currency financing, investment funds, insurance intermediation, asset management, capital market services, and cross-border financial technology activities.

It does not, however, mean that all income received by an IFSC entity is automatically exempt from withholding. Eligibility depends on the type of IFSC unit, the nature of the payment, the unit’s registration status, and the tax years selected for the underlying deduction. 

Scope of applicability of TDS exemption to India IFSC units

The notification has been issued under Section 400(1) read with Section 147 of the Income-tax Act, 2025.

How does the exemption interact with the India IFSC tax deduction?

The notification operates alongside Section 147 of the Income-tax Act, 2025.

Under this provision, an eligible IFSC unit can select a period of 20 consecutive tax years during which it claims the prescribed deduction. The no-TDS benefit is available only for payments received during those selected years.

Outside the selected period, the payer must apply the normal Indian TDS rules.

What documentation is required?

The exemption is not automatic. The IFSC unit and the payer each have separate compliance obligations.

Requirements for India IFSC unit

Before receiving a payment without TDS, the eligible IFSC unit must provide the payer with a Statement-cum-Declaration in Form No. 1(N).

The form must include information such as the following:

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• The unit’s Permanent Account Number (PAN)
• Name, address, and contact details
• The relevant tax year
• Registration or approval details
• The name of the regulatory authority
• Registration reference number and date
• The period selected for the Section 147 deduction
• The initial tax year of the selected period
• A declaration confirming eligibility
• Verification by an authorized signatory

Form 1(N) must be furnished and verified for each tax year in which the exemption is claimed.

Requirements for the payer

After receiving a valid Form 1(N), the payer may make eligible payments without deducting TDS.

The payer must nevertheless report the payments in the prescribed TDS statement under Section 397(3)(b) of the Income-tax Act, 2025, read with Rule 219 of the Income-tax Rules, 2026.

Payers should retain the declaration and supporting records to demonstrate why tax was not withheld.

What should multinational companies review before applying for the exemption?

US and European groups should assess the exemption at both the entity and transaction level.

The TDS exemption addresses one element of Indian tax compliance. It does not by itself resolve questions relating to income characterization, transfer pricing, deductibility, indirect tax, exchange-control requirements, or the recipient’s regulatory permissions.

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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