Chapter VIII - Deductions to be Made in Computing Total Income
Section 147
Section 147: deduction for Offshore Banking Units and IFSC units
Section 147 is the successor to section 80LA of the Income-tax Act, 1961. It allows a 100% deduction of specified income earned by an Offshore Banking Unit set up in a Special Economic Zone, or by a unit of an International Financial Services Centre (IFSC), subject to the number of years fixed by the section and to filing an accountant's report and supporting permissions along with the return of income.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where the following assessee has any income of the nature referred to in sub-section (3), there shall be allowed a deduction equal to 100% of such income:— (a) a scheduled bank, or a bank incorporated under the laws of a country outside India, and having an Offshore Banking Unit in a Special Economic Zone; or (b) a unit of an International Financial Services Centre.
(2) Irrespective of anything contained in section 80LA of the Income-tax Act, 1961 (43 of 1961), the deduction shall be allowed,— (a) for an entity mentioned in sub-section (1)(a),— (i) for twenty consecutive tax years beginning from the relevant tax year; and (ii) in a case, where the tenth year, out of the period of ten consecutive years of deduction allowed under section 80LA(1) of the said Act has ended on the 31st March, 2025, for further ten consecutive years from the tax year beginning on the 1st April, 2026; and (b) in the case of an entity mentioned in sub-section (1)(b), for twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the option of an assessee.
(3) The income referred to in sub-section (1) shall be the income from— (a) an Offshore Banking Unit located in a Special Economic Zone; or (b) the business activities referred to in section 6(1) of the Banking Regulation Act, 1949 (10 of 1949), with undertakings in a Special Economic Zone or entities that develop, develop and operate, or develop, operate and maintain Special Economic Zone; or (c) the approved business activities of any Unit of an International Financial Services Centre set up in a Special Economic Zone; or (d) transfer of an asset being, an aircraft or a ship, leased by a unit referred to in clause (c) if such unit commenced its business operations by 31st March, 2030.
(4) The deduction under this section shall be allowed only if the assessee submits along with the return of income— (a) a report in the form as may be prescribed, from an accountant certifying the correctness of claim of deduction; and (b) a copy of the— (i) permission obtained under section 23(1)(a) of the Banking Regulation Act, 1949 (10 of 1949); or (ii) permission or registration obtained under the International Financial Services Centres Authority Act, 2019 (50 of 2019).
(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 (10 of 1949), or permission or registration under the Securities and Exchange Board of India Act, 1992 (15 of 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 (10 of 1949), or permission or registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), or permission or registration under the International Financial Services Centres Authority Act, 2019 (50 of 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 (28 of 2005); (c) “aircraft” and “ship” shall have the meanings respectively assigned to them in Schedule VI (Note 3).
Introduction
Section 147 grants a time-limited deduction for qualifying offshore banking units and IFSC units on eligible income. The entity's licence or registration, commencement year and income stream determine the applicable percentage and period.
Key takeaways
Offshore and IFSC deduction
A qualifying offshore banking unit or IFSC unit may deduct 100% of the eligible income specified in this section.
Finance Act 2026 periods
The amended rule extends the offshore-banking-unit period to twenty consecutive tax years and permits an IFSC unit to choose twenty consecutive years out of twenty-five, subject to the stated starting-year rules.
Who can claim the deduction
Where the following assessees have income of the nature described below, a deduction equal to 100% of that income is allowed:
- 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
- A unit of an International Financial Services Centre
For how many years
Irrespective of anything contained in section 80LA of the Income-tax Act, 1961, the deduction is allowed:
- For an Offshore Banking Unit (as above): for 20 consecutive tax years beginning from the relevant tax year; and, where the tenth year out of the original ten-year deduction period allowed under section 80LA(1) of the Income-tax Act, 1961 ended on 31 March 2025, for a further 10 consecutive years from the tax year beginning 1 April 2026.
- For a unit of an International Financial Services Centre: for 20 consecutive tax years out of 25 years beginning from the relevant tax year, at the option of the assessee.
What income qualifies
The income eligible for the deduction is income from:
- An Offshore Banking Unit located in a Special Economic Zone
- The business activities referred to in section 6(1) of the Banking Regulation Act, 1949, with undertakings in a Special Economic Zone or entities that develop, develop and operate, or develop, operate and maintain a Special Economic Zone
- The approved business activities of any Unit of an International Financial Services Centre set up in a Special Economic Zone
- Transfer of an asset being an aircraft or a ship, leased by an IFSC unit, if that unit commenced its business operations by 31 March 2030
Conditions to claim the deduction
The deduction is allowed only if the assessee submits, along with the return of income, a report in the prescribed form from an accountant certifying the correctness of the claim, together with a copy of the permission obtained under section 23(1)(a) of the Banking Regulation Act, 1949, or the permission or registration obtained under the International Financial Services Centres Authority Act, 2019, as applicable.
For any Offshore Banking Unit or other unit under this section commencing operations on or after 1 April 2026, the deduction is available only if the unit is not formed by splitting up, reconstruction, reorganisation, or transfer of a business already in existence in India.
Key definitions
| Term | Meaning |
|---|---|
| Relevant tax year | For an Offshore Banking Unit: the tax year in which permission was obtained under section 23(1)(a) of the Banking Regulation Act, 1949, or under the Securities and Exchange Board of India Act, 1992, or any other relevant law. For an IFSC unit: the tax year in which the corresponding permission or registration was obtained under the Banking Regulation Act, 1949, the SEBI Act, 1992, or the International Financial Services Centres Authority Act, 2019 |
| Unit | Has the same meaning as assigned in section 2(zc) of the Special Economic Zones Act, 2005 |
| Aircraft and ship | Have the meanings assigned to them in Schedule VI (Note 3) of the Act |
Step-by-step flow for applying Section 147
- 1
Is the assessee an eligible entity?
Section 147(1): a scheduled bank or foreign-incorporated bank with an Offshore Banking Unit in a Special Economic Zone, or a unit of an International Financial Services Centre.
- No: Section 147 does not apply.
- Yes: Go to the next step.
- 2
If the unit commenced operations on or after 1 April 2026, was it formed without splitting up, reconstruction, reorganisation or transfer of an existing Indian business?
- No: No deduction (Section 147(5)).
- Yes, or commenced earlier: Go to the next step.
- 3
Is the tax year within the allowed period from the relevant tax year?
Offshore Banking Unit: twenty consecutive tax years from the relevant tax year, plus, under Section 147(2)(a)(ii), a further ten consecutive years from the tax year beginning on 1 April 2026 where the tenth year of the old section 80LA(1) period ended on 31 March 2025. IFSC unit: twenty consecutive tax years, chosen by the assessee, out of twenty-five beginning from the relevant tax year.
- No: No deduction for this tax year.
- Yes: Go to the next step.
- 4
Which income falls within Section 147(3)?
Income from the Offshore Banking Unit; Banking Regulation Act section 6(1) activities with SEZ undertakings or developers; approved activities of an IFSC unit in a Special Economic Zone; or transfer of a leased aircraft or ship by an IFSC unit that commenced operations by 31 March 2030.
- 5
Deduct 100% and file the documents with the return
Section 147(4): the accountant's report in the prescribed form and a copy of the Banking Regulation Act section 23(1)(a) permission or the IFSCA Act permission or registration.
Practical checklist
Do
- Verify the unit's regulatory approval, relevant tax year and eligibility of each income stream.
- Maintain unit-level accounts and documentary support for income claimed under the provision.
Avoid
- Do not apply an IFSC deduction percentage to unrelated domestic business income.
- Do not assume a licence date starts the same period for every unit category without checking the subsection.
Illustrative example
Worked example: choosing an IFSC unit's twenty-year block
Hypothetical facts (illustration only, not a real taxpayer): A unit of an International Financial Services Centre set up in a Special Economic Zone obtained its registration under the International Financial Services Centres Authority Act, 2019 in Year 1, which is therefore its relevant tax year. It expects small profits in its first two years. In Year 3, its income from approved business activities is ₹5 crore and it also earns ₹40 lakh of income that does not fall within Section 147(3) (assumed figures).
Choice of years
Out of the 25 years beginning with Year 1 (Years 1 to 25), the unit opts for 20 consecutive years, Years 3 to 22.
Eligible income
₹5 crore from approved business activities falls within Section 147(3)(c); the ₹40 lakh does not.
Deduction for Year 3
100% of ₹5 crore = ₹5 crore. The ₹40 lakh stays in total income.
Documents
The accountant's report and a copy of the IFSCA registration are submitted along with the return of income.
Outcome
- The Year 3 deduction is ₹5 crore; Years 23 to 25 fall outside the chosen block and get no deduction.
- Without the report and registration copy with the return, Section 147(4) would deny the deduction.
Glossary
- IFSC
- International Financial Services Centre relevant to the eligible-unit rules.
- Relevant tax year
- The statutory starting year tied to the unit's regulatory permission or registration.
Frequently asked questions
Who can claim the Section 147 deduction?
A scheduled bank (or a bank incorporated outside India) operating an Offshore Banking Unit in a Special Economic Zone, or a unit of an International Financial Services Centre.
How much of the income can be deducted?
100% of the specified income, for the number of consecutive tax years fixed by the section depending on whether the assessee is an Offshore Banking Unit or an IFSC unit.
Is any certification required?
Yes - the assessee must submit, with the return of income, a report from an accountant certifying the correctness of the claim, along with a copy of the relevant regulatory permission or registration.
Need help applying this provision to your situation?
Talk to our tax team about IFSC and offshore banking tax benefitsLast updated 10 October 2026