GIFT IFSC Tax Implications: Minimum Tax, Dividends and TDS

A GIFT IFSC tax deduction under Section 147 of the Income-tax Act, 2025 does not eliminate every tax liability. Even if an eligible GIFT City IFSC unit claims a 100% deduction, it may still face minimum alternate tax (MAT) or alternate minimum tax (AMT), dividend taxation for shareholders, and tax deducted at source (TDS) on certain payments. Understanding these GIFT IFSC tax implications is essential to assess the actual tax liability, withholding relief and cash tax position of an IFSC business.

GIFT IFSC Tax Implications: Minimum Tax and Dividends

Section 206 of the Income-tax Act, 2025 houses both minimum alternate tax (MAT) for companies and alternate minimum tax (AMT) for other persons.

For companies, section 206(1) applies where the tax payable on total income is less than the minimum alternate tax. Book profit is then deemed to be total income. The rate distinguishes IFSC units:

For persons other than companies, section 206(2) applies AMT on “adjusted total income”, which is total income increased by the deductions claimed. The rates are 9% for an assessee that is a unit located in an IFSC deriving income solely in convertible foreign exchange, 15% for a co-operative society, and 18.5% otherwise.

Three points deserve emphasis.

The condition is strict. The 9% rate is available only where income is derived solely in convertible foreign exchange. A unit with a rupee income stream should examine whether the concessional rate is available to it at all, because the consequence is not a proportionate adjustment but the ordinary rate.

AMT bites on the deduction itself. Because adjusted total income adds back the deductions claimed, an IFSC unit organised as an LLP and claiming section 147 will typically find AMT engaged. This is by design: the minimum tax regime exists precisely to place a floor under deduction-driven profiles.

MAT credit has changed. The Finance Act, 2026 substituted section 206(3). Credit carried forward under section 115JAA of the 1961 Act as on 31 March 2026 may be set off, but the set-off is capped at 25% of the tax payable on total income for the year, with the balance carried forward, and no carry-forward or set-off beyond the fifteenth tax year following the year in which the credit first became allowable. Groups modelling the cash tax cost of an IFSC unit against accumulated credits should re-run those models on the amended provision. Two further conditions are decisive and should not be overlooked. First, set-off of that brought-forward credit is available only where the company is taxed under the new (concessional) regime; a company that remains in the old regime pays MAT without the benefit of set-off. Second, from tax year 2026-27 MAT operates as a final tax, so no fresh credit arises on MAT paid from 1 April 2026. A foreign company is subject to its own transitional rule on the use of credit, which should be checked separately.

Dividends: A 10% Rate for Non-Resident Shareholders

Dividends are taxable in the shareholder’s hands. For non-residents and foreign companies, section 207(1) sets special rates. Its Table distinguishes:

• dividends generally: 20%; and
• dividends received from a unit in an International Financial Services Centre: 10%.

This is a rate applicable to the shareholder, not a relief for the unit, and it operates subject to the general framework, including the applicable surcharge and cess and any more favourable treaty rate where the recipient is eligible. For an Indian-resident shareholder of an IFSC unit, the ordinary dividend taxation rules apply.

For non-resident shareholders, the analysis therefore has three steps: the statutory rate under section 207, the treaty rate (if any) and the conditions for claiming it, and the withholding mechanics at the time of payment.

Withholding on Payments to an IFSC unit

The most frequent practical irritation for an IFSC unit is that its Indian counterparties withhold tax on payments to it, even though its income may be fully deductible. The Central Government has addressed this by notification rather than by a blanket exemption.

Two notifications matter most. Both were issued under section 80LA(1A) and (2) of the 1961 Act, and both operate by notifying that no deduction of tax shall be made in respect of specified payments to specified IFSC units.

• Notification dated 7 March 2024 covers a long list: for example, interest income on external commercial borrowings or loans, professional fees, referral fees, brokerage and commission on factoring and forfaiting for a Banking Unit; insurance commission for an IFSC insurance intermediary office; interest and dividend income and factoring commission for a Finance Company or Finance Unit; professional fees for a Fund Management Entity; dividends for a broker-dealer; advisory fees for an investment adviser; distribution and commission fees for a registered distributor; and fees for custodians, credit rating agencies, investment bankers, debenture trustees, international trade finance service providers and FinTech entities.
• Notification dated 20 June 2025 extends the approach to further categories and receipts, including professional, consulting or advisory fees of a book-keeping, accounting, taxation and financial crime compliance services provider; payments by recognised stock exchanges and commission incentives for broker-dealers; interest on lease and freight or hire charges for a finance company; portfolio management, investment advisory, management and performance fees for a Fund Management Entity; and fees, interest, data-centre rent and penalties levied by recognised clearing corporations, depositories and stock exchanges.

The relief is conditional and mechanical:

1. the payee IFSC unit furnishes a statement-cum-declaration in Form No. 1 to the payer, identifying the years for which it opts to claim the deduction;
2. the payer stops deducting tax only after receiving that form, and must still report the payments in its TDS statement under section 200(3) of the 1961 Act read with rule 31A;
3. the relief is available only for the years declared in Form No. 1. For any other year, the payer must deduct; and
4. the relief extends only to income of the unit from the business for which it was approved to be set up in the IFSC.

Other measures in the same family, traceable in IFSCA’s notifications database, include relaxation from furnishing Form 15C for remittances made by IFSC units (16 October 2023), exemption from obtaining PAN for non-residents opening a bank account with an IFSC Banking Unit (10 October 2023), and non-applicability of sections 194-O and 206C(1H) in specified cases (29 September 2020).

A Live Transitional Question

These notifications were issued under the 1961 Act, which was repealed with effect from 1 April 2026. Section 536(2)(j) of the Income-tax Act, 2025 saves any notification issued under the repealed Act “so far as it is not inconsistent with the corresponding provisions” of the new Act, and deems it to be issued under the corresponding provision.

Two consequences follow. First, the withholding reliefs continue to operate. Second, their text is framed around the ten consecutive assessment years for which a payee opts to claim under section 80LA. Since the Finance Act, 2026 extended the deduction period under section 147 of the 2025 Act to twenty years, the correspondence between the declared years in Form No. 1 and the extended entitlement is a question of how the saving applies. As at 17 September 2026, no replacement notification framed by reference to section 147 of the 2025 Act was traced. Units relying on these reliefs for years beyond the original ten-year window should treat the point as unresolved and document their position.

A Short Compliance Checklist

• Confirm whether income is derived solely in convertible foreign exchange before assuming the 9% minimum-tax rate.
• For LLP or trust structures, model AMT on adjusted total income, not on book profit.
• Re-check MAT credit assumptions against the substituted section 206(3).
• Issue Form No. 1 to every Indian payer, and re-issue as required for each relevant year. The relief does not operate retrospectively for payments made before the payer receives it.
• For non-resident shareholders, apply section 207 and the treaty analysis separately from the unit’s own position.

Frequently Asked Questions

1. What is the minimum tax rate for a GIFT IFSC unit?

Eligible IFSC units may qualify for a 9% MAT or AMT rate, subject to the statutory conditions, including deriving income solely in convertible foreign exchange.

2. Are GIFT IFSC units exempt from minimum tax?

No. The deduction under section 147 does not automatically eliminate MAT or AMT obligations.

3. What is the dividend tax rate for non-resident shareholders of an IFSC unit?

Section 207 provides a 10% rate for dividends received from an IFSC unit, subject to applicable surcharge, cess and eligible treaty relief.

4. Can an IFSC unit receive payments without TDS?

Yes, for specified payments covered by applicable notifications, provided the prescribed conditions, including submission of Form No. 1, are satisfied.

5. Do the existing IFSC withholding tax notifications remain valid after April 2026?

Section 536 preserves earlier notifications where they are consistent with the corresponding provisions of the Income-tax Act, 2025. The application of the existing ten-year wording to the extended twenty-year deduction period remains an issue requiring careful assessment.