The Finance Bill, 2026 proposes significant incentives to enhance the competitiveness of International Financial Services Centres (IFSCs) and Offshore Banking Units (OBUs). Under section 147 of the Income-tax Act, 2025, the tax holiday for eligible units is proposed to be extended from 10 years to 20 consecutive years—out of 25 years for IFSC units and 20 consecutive years for OBUs. This expansion offers greater certainty and long-term tax stability to global financial businesses operating from IFSCs. Additionally, once the deduction period expires, the business income of such units will be taxed at a concessional rate of 15%, rationalising post-holiday taxation. The amendments also tighten eligibility by ensuring benefits are available only to genuinely new units and clarify key definitions such as “relevant tax year” and “unit.” These changes, effective from 1 April 2026, aim to attract investment, deepen financial activity, and position IFSCs as globally competitive financial hubs.
Extension of period of deduction for units in IFSC and rationalization of tax rate
The provisions of section 147 provide for deduction of 100% on certain incomes to the units of IFSC and OBUs. This is available for 10 consecutive years out of 15 years for units in IFSC and 10 consecutive years for OBUs.
2. To increase the competitiveness of IFSC, it is proposed to increase the period of deduction to 20 consecutive years out of 25 years for units in IFSC and 20 consecutive years for OBUs. It is also proposed that the business income of these units from IFSC after the expiry of period of deduction will be taxed at rate of 15%.
3. These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 38 and 51]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 38 of the Bill seeks to amend section 147 of the Income-tax Act 2025 relating to deductions for income of Offshore Banking Units and Units of International Financial Services Centre.
Sub-section (1) of the said section allows deduction to certain entities specified therein. Sub-section (2) of the said section provides the time period for such deduction.
It is proposed to amend sub-section (2) of the said section so as to extend the tax holiday for twenty consecutive years from ten years and twenty consecutive years out of twenty-five years respectively to entities under clauses (a) and (b) of sub-section (1) of the said section.
It is further proposed to substitute sub-sections (5) so as to provide that the units referred to in sub-section (1) shall be entitled to benefit if such unit is not formed by splitting up, reconstruction, reorganisation or transfer a business.
It is also proposed to insert sub-section (6) to the said section so as to explain the expression “relevant tax year”, and to define the expressions “Unit” and “aircraft and ship”.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 51 of the Bill seeks to substitute sections 217 and 218 of the Income-tax Act, 2025 relating to benefit under Chapter to be available in certain cases even after assessee becomes resident and Chapter not to apply if the assessee so chooses, respectively, with new sections.
The proposed section 217 provides for application of benefits under sections 212 to 216.
It is proposed to substitute the said sections so as to give effect to the proposal related to taxation of income of Offshore Banking Units and Units of International Financial Services Centre in non-holiday period.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
38. Amendment of section 147.
In section 147 of the Income-tax Act,––
(a) for sub-section (2), the following sub-section shall be substituted, namely:––
“(2) Irrespective of anything contained in section 80LA of the Income-tax Act, 1961, the deduction shall be allowed––
(b) for twenty consecutive tax years beginning from the relevant tax year in the case of an entity mentioned in sub-section (1)(a);
(c) for twenty consecutive tax years out of twenty-five 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).”;
(b) for sub-section (5), the following sub-sections shall be substituted, namely:––
‘(5) In respect of any Offshore Banking Unit or any other unit referred in sub-section (1), commencing operations on or after the 1st April, 2026, the deduction under sub-section (1) shall be available only if such unit is not formed by splitting up or reconstruction or reorganisation or transfer of a business already in existence in India;
(6) For the purposes of this section,—
(a) “relevant tax year” shall be,—
(i) in case of an entity referred to 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 in force was obtained; or
(ii) in case of an entity referred to 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 Centres 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).’.
51. Substitution of new sections for sections 217 and 218.
For sections 217 and 218 of the Income-tax Act, the following sections shall be substituted, namely:––
“217. Application of benefits under sections 212 to 216.
(1) Where a non-resident Indian in any tax year,––
(a) becomes assessable as a resident in India in respect of total income in a subsequent year; and
(b) furnishes a declaration in writing to the Assessing Officer along with his return of income under section 263 for the tax year for which he is so assessable, to the effect that provisions of sections 212 to 216 shall continue to apply to him in relation to the investment income derived from any foreign exchange asset referred to in section 212(e) other than shares in an Indian company, then the provisions of sections 212 to 216 shall continue to apply in relation to such income for that tax year and every subsequent tax year until the transfer or conversion (otherwise than by transfer) of such assets into money.
(2) A non-resident Indian may choose not to be governed by the provisions of sections 212 to 216 for any tax year by declaring it in his return of income under section 263 for such tax year, and if he does so,—
(a) the provisions of sections 212 to 216 shall not apply to him for that tax year; and
(b) his total income for that tax year shall be computed and charged to tax according to the other provisions of this Act.”.
218. Tax on business income of Offshore Banking Units or International Financial Services Centre unit.
Where the total income of an assessee includes income of the nature referred to in section 147(3), the aggregate of income-tax payable by the assessee shall be the aggregate of income-tax computed on the income specified in column B of the Table below at the rate specified in the corresponding entry in column C of the said Table:
TABLE
| Sl. No. | Income | Rate of income-tax payable |
| 1. | Income referred to in section 147(3) | 15% |
| 2. | Total income as reduced by income referred to in Sl. No. (1). | Rates in force. |
