Twenty Years, Not Ten: GIFT City Tax Holiday Under Section 147 After the Finance Act, 2026

The phrase “GIFT City tax holiday” conceals three legal questions that decide whether anything is actually exempt: which entity qualifies, which income qualifies, and for how long. All three moved during 2025 and 2026. The Income-tax Act, 1961 was repealed and replaced by the Income-tax Act, 2025 with effect from 1 April 2026, so the familiar section 80LA is no longer the operative provision. The Finance Act, 2026 then doubled the period of the deduction and changed the rate that applies afterwards.

This article states the position as it stands on 17 September 2026.

Where the Provision Now Sits?

Section 147 of the Income-tax Act, 2025 is the successor to section 80LA of the 1961 Act. It is headed “Deductions for income of Offshore Banking Units and Units of International Financial Services Centre”.

The 1961 Act stands repealed by section 536 of the 2025 Act, but the repeal is subject to detailed savings. Proceedings for tax years beginning before 1 April 2026 continue under the 1961 Act, and elections or options exercised under the old Act are treated as exercised under the corresponding provision of the new one. A unit that had already begun claiming under section 80LA therefore does not start afresh; it continues under section 147.

Who Qualifies for the GIFT City Tax Holiday?

To qualify for the GIFT City tax holiday, section 147(1) identifies two categories of assessee:

• 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; and
• a unit of an International Financial Services Centre.

“Unit” takes its meaning from section 2(zc) of the SEZ Act, 2005.

Which Income Qualifies?

The GIFT City tax holiday under section 147(1) allows a 100% deduction for specified income under section 147(3) of the Income-tax Act, 2025, including income from:

• an Offshore Banking Unit located in an SEZ;
• the business activities referred to in section 6(1) of the Banking Regulation Act, 1949 with undertakings in an SEZ, or with SEZ developers;
• the approved business activities of any IFSC unit set up in an SEZ; and
• the transfer of an asset being an aircraft or a ship leased by such a unit, if the unit commenced business operations by 31 March 2030.

The words “approved business activities” do significant work. The deduction attaches to income from the activities the unit is approved to carry on, not to every receipt of the entity. Income outside that perimeter is taxed in the ordinary way. Since the characterisation is fact-specific, the scope of a unit’s Letter of Approval and its IFSCA registration are tax documents as much as regulatory ones.

For How Long: the 2026 Change

Before the Finance Act, 2026, section 147(2) mirrored section 80LA of the 1961 Act: ten consecutive tax years for an Offshore Banking Unit, and ten consecutive tax years out of fifteen, at the assessee’s option, for an IFSC unit.

The Finance Act, 2026 (No. 4 of 2026, assented to on 30 March 2026), by section 47 (enacting clause 38 of the Finance Bill, 2026), substituted section 147(2) so that the deduction is allowed:

• for twenty consecutive tax years beginning from the relevant tax year, for an entity under section 147(1)(a) (the Offshore Banking Unit category); and
• for twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the assessee’s option, for a unit of an IFSC.

The substituted provision opens with the words “Irrespective of anything contained in section 80LA of the Income-tax Act, 1961”, which preserves the extension for units whose entitlement originated under the old law. The Notes on Clauses record the intention to extend the period “for twenty consecutive years from ten years and twenty consecutive years out of twenty-five years respectively”, and state that the amendments take effect from 1 April 2026 and apply from tax year 2026-27.

The “relevant tax year” from which the window runs is defined in section 147(6)(a): broadly, the tax year in which permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the SEBI Act, 1992 or the IFSCA Act, 2019, was obtained.

A New Anti-Splitting Condition

The same provision of the Finance Act also substituted section 147(5). For any Offshore Banking Unit or other unit referred to in section 147(1) commencing operations on or after 1 April 2026, the deduction is available only if the unit “is not formed by splitting up or reconstruction or reorganisation or transfer of a business already in existence in India”.

This is a significant structural condition for Indian groups. A unit created by moving an existing Indian business into the IFSC risks losing the deduction altogether. The condition echoes similar language elsewhere in Indian tax and regulatory practice, including the conditions attached to the 2024 notification of book-keeping, accounting, taxation and financial crime compliance services as financial services. As at the cut-off date, there is no judicial interpretation of the new section 147(5), and its application to reorganisations that involve new business lines rather than transferred ones is untested.

What Happens after the Twenty Years

The Finance Act, 2026 did not leave the post-deduction position to the general rates. The Act, by section 60 (enacting clause 51 of the Bill), substituted sections 217 and 218 of the 2025 Act. The new section 218 provides that where an assessee’s total income includes income of the nature referred to in section 147(3), the tax payable is computed as:

The practical effect is a concessional 15% rate for qualifying IFSC and Offshore Banking Unit business income outside the deduction window, in place of the rate that would otherwise apply to the assessee. This is relevant to long-horizon planning: the choice of which twenty of the twenty-five years to claim now determines which years fall to the 15% rate rather than to the ordinary rate.

Compliance Conditions that are Easy to Miss

Section 147(4) makes the deduction conditional on filing, with the return of income:

• a report from an accountant, in the prescribed form, certifying the correctness of the claim; and
• a copy of the permission under section 23(1)(a) of the Banking Regulation Act, 1949, or the permission or registration under the IFSCA Act, 2019.

These are substantive conditions of the deduction, not formalities.

The Minimum Tax Floor Still Applies

Section 147 reduces taxable income; it does not switch off the minimum tax regime. Under section 206(1)(b)(i) of the 2025 Act, a company that is a unit located in an IFSC and derives its income solely in convertible foreign exchange pays minimum alternate tax on book profit at 9%. The corresponding alternate minimum tax rate for non-corporate IFSC units, under section 206(2), is also 9%. The Finance Act, 2026 reduced the general MAT rate for other companies from 15% to 14% but left the 9% IFSC rate untouched. Article 6 examines this regime, and the dividend and withholding position, in detail.

What This Means in Practice

• The correct citation for the IFSC deduction from tax year 2026-27 is section 147 of the Income-tax Act, 2025, not section 80LA. Documents, board notes and offer materials referring only to section 80LA are out of date for current years, though the 1961 Act remains relevant to earlier years and pending proceedings.
• The extension to twenty years applies from tax year 2026-27 and, by the opening words of section 147(2), also benefits units whose claim began under section 80LA.
• Units commencing operations on or after 1 April 2026 must be able to demonstrate that they are not a reorganised version of an existing Indian business.
• The deduction is confined to income from approved business activities, and the surrounding compliance conditions in section 147(4) are strict.

Frequently Asked Questions

1. What is the GIFT City tax holiday under section 147?

Section 147 of the Income-tax Act, 2025 provides a 100% deduction for eligible income of qualifying IFSC units and Offshore Banking Units, subject to statutory conditions.

2. How long is the GIFT City tax holiday?

Eligible Offshore Banking Units can claim the deduction for 20 consecutive tax years. IFSC units can claim it for 20 consecutive tax years out of a 25-year period, at their option.

3. Which income qualifies for the deduction?

The deduction covers specified income from approved business activities of eligible IFSC units and other qualifying income under section 147(3).

4. Does the tax holiday apply to existing IFSC units?

Yes. The 2026 amendment preserves the extended deduction period for eligible units whose entitlement originated under section 80LA of the Income-tax Act, 1961.

5. What tax rate applies after the deduction period?

Qualifying income under section 147(3) is subject to a concessional 15% tax rate under section 218, subject to the applicable provisions.

6. What are the compliance requirements for claiming the deduction?

Section 147(4) requires an accountant’s report certifying the claim and a copy of the relevant regulatory permission or registration to be furnished with the return of income.