Cross border transactions in India are typically regulated under the foreign exchange control regulations. Gujarat International Finance Tec-City (GIFT City), located in Gujarat, India, is the country’s first International Financial Services Centre (“IFSC”), conceptualized as a foreign exchange free zone to facilitate offshore financial activity on Indian soil and India’s integration with global financial markets.
Under the Indian tax laws, in determination of their taxable income, business units set up in IFSC could claim a 100% deduction of income earned from the business for which they were approved to be set up in IFSC for any 10 consecutive years within a 15-year window starting from the year in which permission to set-up was granted.[1] In view of the said tax holiday, the Central Board of Direct Taxes (“CBDT”) had also exempted specified payments to such units in IFSC from obligation to withhold tax (“WHT”), such exemption being available for a corresponding period of 10 years.[2]
The new Income-tax Act, 2025 (“New Act”), which has replaced the earlier tax legislation, continues this benefit for IFSC units and extends the tax holiday to 20 consecutive years within a 25-year window.[3] Once the tax holiday ends, a concessional 15% tax rate on specified income applies instead of the standard corporate rate, easing the transition.[4]
The CBDT has now issued Notification No. 80/2026 dated 10 July 2026, effective from 1 April 2026, to carry forward the WHT exemption framework to align with extended tax holiday under the New Act. It continues to cover interest, dividends, insurance commissions, brokerage and certain service fees. Apart from the extension of the period of exemption from WHT, the said notification is merely an update of legal references to New Act and updated declaration requirements. Payee IFSC units must furnish a statement-cum-declaration in Form No. 1(N) to each payer, identifying the 20 years elected for the tax holiday.
While the exemption from WHT provisions has been extended, certain ambiguities remain, including whether the extended tax holiday and WHT exemption would also be available to IFSC units that have already exhausted their original 10-year benefit. It is unclear whether WHT exemption on interest payments (which clearly covers loan interest) to finance companies or units in IFSC, also extends to interest on debentures which are commonly used in group financing. A literal reading could exclude such interest on securities from the exemption, leaving Indian payers exposed to an unbudgeted WHT obligation. Further, the exemption in respect of certain income streams (such as insurance commission, fund management fee, service fee of capital market intermediaries etc.), is only provided for residents while branches of non-residents in IFSC could continue to be subject to WHT in respect of such incomes. For such cases where an express WHT exemption has not been provided, it may be possible for the parties to explore availing a lower withholding certificate by specifically approaching the tax authorities.
The new WHT exemption aligns with the extended tax holiday of 20 years and the new post-holiday concessional tax rate, it significantly improves the tax certainty for units in GIFT IFSC. The WHT exemption is a positive development for the overall ecosystem and would help units in IFSC to optimize their cashflows as well as payers to IFSC units in net-of-tax arrangements (i.e., where the payer contractually bears the tax cost). That said, unresolved questions - particularly on debenture interest and non-resident branches - mean payers should confirm the tax treatment before relying on the exemption.
