Section 147 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 147 allows a deduction equal to hundred per cent of certain income of an Offshore Banking Unit in a Special Economic Zone and of a unit of an International Financial Services Centre. The deduction runs for a long block of tax years, and the claim is allowed only if two documents go in with the return. This article reads the section as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Section 147(1) gives a deduction of hundred per cent of the income described in sub-section (3) to (a) a scheduled bank or foreign bank with an Offshore Banking Unit in a Special Economic Zone, and (b) a unit of an International Financial Services Centre. The period is twenty consecutive tax years for the banks and twenty consecutive tax years out of twenty-five (at the assessee's option) for IFSC units. The deduction is allowed only if an accountant's report and a copy of the permission or registration are submitted with the return.
Scope and the amendment by the Finance Act, 2026
Section 147 is part of Chapter VIII. Sub-section (2) was substituted by the Finance Act, 2026, with effect from 1 April 2026, and sub-sections (5) and (6) were substituted for the earlier sub-section (5) by the same Finance Act with effect from 1 April 2026. This article explains the text as it now stands. The Act as a whole came into force on the 1st April, 2026 (section 1(3)); check later amendments, rules and notifications before acting.
For the neighbouring deductions, see the Chapter VIII guide. If your unit is planning its first claim, our tax planning advisory team can walk through the eligibility test below.
Section 147(1): who gets the deduction
Where the following assessee has any income of the nature referred to in sub-section (3), a deduction equal to hundred per cent of that income is allowed:
- (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.
Section 147(2): the period of deduction
Sub-section (2) begins "Irrespective of anything contained in section 80LA of the Income-tax Act, 1961 (43 of 1961)". That is the Act's own reference and nothing more is said about the 1961 Act here. The deduction is allowed:
| Entity | Period |
|---|---|
| (a) an entity in sub-section (1)(a) | (i) twenty consecutive tax years beginning from the relevant tax year; and (ii) in a case where the tenth year, out of the 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 |
| (b) an entity in sub-section (1)(b) | twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the option of an assessee |
The footnote to the substituted sub-section prints a page break inside clause (a); the words of clause (a)(ii) resume after the footnote. Read them together as set out above.
Section 147(3): what income qualifies
The income in sub-section (1) is 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 a 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.
Clause (b) quotes a provision of the Banking Regulation Act, 1949; the reader should check that Act for what the business activities are. The Income-tax Act, 2025 explains nothing more about it.
Section 147(4): documents to submit with the return
The deduction is allowed only if the assessee submits, along with the return of income:
- a report in the form as may be prescribed, from an accountant, certifying the correctness of the claim of deduction; and
- 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).
The form of the report is left to the Income-tax Rules, 2026; see our rule-wise guides for the detail. The words "only if" make the documents a condition of the deduction, not a formality.
Section 147(5): units that start on or after 1 April 2026
For any Offshore Banking Unit or other unit referred to in sub-section (1) that commences operations on or after the 1st April, 2026, the deduction under sub-section (1) is available only if the unit is not formed by splitting up, or reconstruction, or reorganisation, or transfer of a business already in existence in India.
Section 147(6): definitions
For the purposes of the section:
| Term | Meaning |
|---|---|
| "relevant tax year" for 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 (15 of 1992) or any other relevant law in force was obtained |
| "relevant tax year" for 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 |
| "Unit" | the same meaning as in section 2(zc) of the Special Economic Zones Act, 2005 (28 of 2005) |
| "aircraft" and "ship" | the meanings respectively assigned in Schedule VI (Note 3) |
Three other laws appear in this table (the Banking Regulation Act, 1949, the Securities and Exchange Board of India Act, 1992 and the Special Economic Zones Act, 2005); check each for the permission or definition they carry. For the Schedule that gives the meaning of aircraft and ship, see our post on Schedule VI to the Income-tax Act, 2025.
A worked example
Names and the year of permission below are invented; the rate and periods are those of the section.
Harbour Offshore Bank, a scheduled bank, obtains permission under section 23(1)(a) of the Banking Regulation Act, 1949 for an Offshore Banking Unit in a Special Economic Zone in a tax year we will call Year 1. Year 1 is the "relevant tax year".
- Income from the Offshore Banking Unit in Year 1 is, say, Rs. 40,00,000 (assumed). The deduction is hundred per cent of it: Rs. 40,00,000 x hundred per cent = Rs. 40,00,000, so nothing from this income enters total income, provided the accountant's report and a copy of the permission go in with the return.
- The deduction continues for twenty consecutive tax years beginning with Year 1.
- The unit commenced operations on or after 1 April 2026, so under sub-section (5) it must not have been formed by splitting up, reconstruction, reorganisation or transfer of a business already in existence in India.
Now take Meridian IFSC Leasing, a unit of an International Financial Services Centre set up in a Special Economic Zone, which began business operations before 31st March, 2030 and leases an aircraft. Income from the transfer of that aircraft falls within sub-section (3)(d). Meridian may choose which twenty tax years out of the twenty-five beginning from its relevant tax year to claim.
Need help with an IFSC or Offshore Banking Unit deduction?
The documents under sub-section (4) and the start-date condition under sub-section (5) decide whether a claim stands. Our tax planning advisory service can check the permission trail, the relevant tax year and the option for the twenty-of-twenty-five block before the return is filed.
Key takeaways
- The deduction is hundred per cent of qualifying income under section 147(3).
- Banks with an Offshore Banking Unit get twenty consecutive tax years; IFSC units get twenty out of twenty-five, at their option.
- An accountant's report and a copy of the permission or registration must be submitted with the return.
- Units starting on or after 1 April 2026 must not be formed by splitting up, reconstruction, reorganisation or transfer of an existing Indian business.
- Sub-sections (2), (5) and (6) were substituted by the Finance Act, 2026, with effect from 1 April 2026.
Read next
- Section 146: deduction for additional employee cost
- Sections 148 to 150: deductions for dividends and co-operative societies
- Chapter VIII of the Income-tax Act, 2025
- Schedule VI to the Income-tax Act, 2025
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.