Chapter XIII - Determination of Tax in Special Cases
Section 218
Section 218: tax on business income of Offshore Banking Units or IFSC units
Section 218 sets a flat 15% tax rate on a specific category of business income - income of the nature referred to in section 147(3) - typically earned by Offshore Banking Units or units in an International Financial Services Centre.
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Need advice on Section 218?
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
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:
| 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. |
Introduction
Section 218 is a split-rate computation rule. It applies when total income contains the income described in section 147(3): that component is taxed at 15%, while the rest of total income is charged at the rates otherwise in force.
The Finance Act, 2026 substituted this section with effect from 1 April 2026. The 15% rate therefore belongs to the specified section 147(3) component, not automatically to every receipt of an Offshore Banking Unit or International Financial Services Centre unit.
Key takeaways
Identify the eligible component
The 15% entry in the statutory table refers specifically to income of the nature in section 147(3). The classification must be checked before applying the rate.
Compute the balance separately
Total income after removing that specified component is taxed at the rates in force. Section 218 combines the two computed amounts.
Use the amended provision
The current section was substituted by the Finance Act, 2026. An older text of section 218 concerned an NRI election and does not describe the current rule.
The rate
Where the total income of an assessee includes income of the nature referred to in section 147(3), the aggregate income-tax payable is computed at:
| Income | Rate of income-tax payable |
|---|---|
| Income referred to in section 147(3) | 15% |
| Total income as reduced by that income | Rates in force |
When this provision applies
Start with the income classification in section 147(3). Operating in an IFSC or through an Offshore Banking Unit does not by itself put every receipt into the 15% row.
Section 218 then combines the tax on the specified component with tax on the balance of total income at the rates in force. It should not be read as a blanket 15% rate for the entire assessee.
How to prepare the computation
- Identify the tax year and use the Finance Act, 2026 version applicable from 1 April 2026.
- Document which income is of the nature referred to in section 147(3).
- Reconcile that component to the total-income computation; keep the balance separate.
- Apply the two statutory rows, then review the other provisions relevant to the final tax liability.
Records to keep for professional review
Maintain the income computation, relevant unit and business documents, and a reconciliation explaining why each classified receipt belongs to the section 147(3) category. These are practical review aids; Section 218 itself does not prescribe this as a separate filing checklist.
Practical checklist
Do
- Identify and document the income falling within section 147(3).
- Keep the specified income and the remaining total income separate when computing tax.
Avoid
- Do not apply the 15% rate to the whole total income merely because the assessee operates in an IFSC or through an Offshore Banking Unit.
Illustrative example
Illustration: separating the specified income component
Hypothetical facts (illustration only, not a real taxpayer): Assume, only for illustrating the two-row calculation, total income of ₹50 lakh contains ₹20 lakh of income of the nature referred to in section 147(3). Eligibility and all other computation questions are assumed to have been resolved.
Apply row 1
15% of ₹20 lakh is ₹3 lakh for the specified component.
Identify the balance
₹50 lakh minus ₹20 lakh leaves ₹30 lakh for the rates-in-force computation under row 2.
Outcome
- The basic tax under the section combines ₹3 lakh with tax on the ₹30 lakh balance at the applicable rates in force.
- This illustration does not calculate surcharge, cess, credits or other adjustments and is not an eligibility conclusion for a particular unit.
Glossary
- Specified income component
- Income of the nature referred to in section 147(3), to which the first row of section 218 refers.
- Rates in force
- The applicable tax rates for the balance of total income; section 218 does not replace them with 15%.
- Aggregate income-tax
- The combination of the amounts computed under the two rows of the statutory table.
Section 218 taxes the section 147(3) income component at 15% and the balance of total income at the rates in force; it is a split computation under the amended Act.
Frequently asked questions
What rate applies to income covered by Section 218?
15%, on income of the nature referred to in section 147(3), with the rest of total income taxed at the rates otherwise in force.
Does all income of an IFSC unit qualify for 15%?
Section 218 links the 15% rate specifically to income of the nature referred to in section 147(3). The remaining total income follows the rates in force.
Does Section 218 still govern the former NRI opt-out election?
The Finance Act, 2026 substituted section 218 with effect from 1 April 2026. Its current text concerns specified Offshore Banking Unit or IFSC income; the current section 217(2) addresses the election concerning sections 212 to 216.
Does the 15% table entry give the final amount payable in every case?
No. The table determines tax on the specified component and the balance. The complete computation must also consider any other applicable provisions and adjustments.
Need help applying this provision to your situation?
Get help with your Offshore Banking Unit / IFSC unit tax positionLast updated 10 October 2026