CBDT Notifies TDS Exemption for Payments to IFSC Units (Effective from July 1, 2025) 

In a significant move set to bolster the International Financial Services Centre (IFSC) ecosystem, the Central Board of Direct Taxes (CBDT) has issued Notification No. 67/2025 on June 20, 2025. This notification, effective from July 1, 2025, exempts certain payments made by mainland entities to eligible units in GIFT City IFSC from Tax Deducted at Source (TDS). This initiative aims to enhance the ease of doing business, attract foreign capital, and improve liquidity within the IFSC.

The exemption, however, is not unconditional and comes with specific regulatory requirements for both the payee (IFSC unit) and the payer.

What the IFSC Unit (Payee) Must Do:

To avail of this crucial TDS exemption, an IFSC unit must adhere to the following conditions:

• Submit Form 1 Annually: The IFSC unit must submit a statement-cum-declaration in Form 1 to each payer. This form serves as a declaration that the unit has opted for the tax holiday benefits available under Section 80LA of the Income-tax Act.
• Annual Verification: This Form 1 must be filed and verified every year throughout the opted 10-year tax holiday window.
• Income from Approved Activity: Crucially, the exemption applies only to business income derived from activities explicitly approved for the IFSC unit.

What the Payer Must Do:

Mainland entities making payments to IFSC units must also follow specific guidelines to ensure compliance:

• Receipt of Form 1 is Key: Payers should cease deducting TDS only after receiving a duly filled and verified Form 1 from the concerned IFSC unit.
• Report Exempt Payments: All such payments, on which TDS has not been deducted due to this exemption, must be reported in the quarterly TDS returns. This reporting is to be done as per Section 200(3) read with Rule 31A of the Income-tax Rules.
• Retain Form 1: It is imperative for payers to properly retain the received Form 1 for audit and compliance purposes.

Important Considerations:

• Non-Compliance by IFSC Unit: If an IFSC unit fails to submit Form 1, or if the exemption is claimed beyond its eligible 10-year period, TDS must be deducted as per the normal provisions of the Income-tax Act.
• Scope of Exemption: The notification specifies the nature of payments and the categories of IFSC units that qualify for this exemption. While the full table outlines these details, it generally covers payments like professional, consulting, and advisory fees; commission incentives; interest on leases; freight or hire charges; portfolio management fees; advisory and management fees; professional and technical service fees; rent for data centers; and penalties levied by exchanges.

This move is a welcome development for the Indian financial landscape, reinforcing the government’s commitment to developing GIFT City as a globally competitive financial hub by reducing compliance burdens and enhancing operational efficiency for IFSC units.

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Dhairya Chaniyara

Senior Associate | Tax & Regulatory | dhairya.c@treelife.in

Focuses on direct tax and regulatory services with a specialization in GIFT IFSC. Brings experience from various industries, including manufacturing, FMCG, IT-ITES, and healthcare, to deliver impactful tax solutions.