Sections 218 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.
Sections 218 to 220 deal with three narrow situations in Chapter XIII, Part E. Section 218 taxes certain business income of an Offshore Banking Unit or International Financial Services Centre unit at 15%. Section 219 gives relief when an Indian branch of a foreign bank is converted into an Indian subsidiary. Section 220 lets the Central Government adapt the Act for a foreign company that becomes resident in India. This article follows the Income-tax Act, 2025 as amended by the Finance Act, 2026.
Under section 218, income of the kind referred to in section 147(3) is taxed at 15%, and the rest of the total income at rates in force. Under section 219, capital gains on the conversion of a foreign bank's Indian branch into a subsidiary are not chargeable to tax, subject to notified conditions. Under section 220, a foreign company said to be resident in India is dealt with under the Act as adapted by notification. Failure to comply with the conditions can lead to re-computation within four years.
By section 1(3), the Act is in force from 1 April 2026, save as otherwise provided. Section 218 was substituted by the Finance Act, 2026, with effect from 1 April 2026; this article explains it as it now stands. For help with companies and group structures, see our tax planning advisory page. Later amendments, rules and notifications should be checked.
Section 218: tax on Offshore Banking Unit and IFSC unit income
The heading of section 218 is "Tax on business income of Offshore Banking Units or International Financial Services Centre unit". The section applies "where the total income of an assessee includes income of the nature referred to in section 147(3)". The aggregate income-tax payable by the assessee is then the aggregate of income-tax computed on the income in column B of the Table at the rate in column C.
| Serial number | Income (column B) | Rate of income-tax payable (column C) |
|---|---|---|
| 1 | Income referred to in section 147(3) | 15% |
| 2 | Total income as reduced by income referred to in serial number 1 | Rates in force |
Three things are worth noting.
- The section does not itself describe the income. It refers to section 147(3), and a reader needs that sub-section to see exactly which income is meant.
- The 15% applies to that income only. The remainder of the total income is charged at "rates in force", which is defined in section 2(90) and is not printed here.
- The text is silent on any threshold of income or any conditions beyond the Table.
Section 219: conversion of an Indian branch of a foreign company into an Indian subsidiary
Sub-section (1): the relief
Section 219(1) applies where a foreign company is engaged in the business of banking in India through its branch situated in India, and the branch is converted into a subsidiary Indian company as per the scheme framed by the Reserve Bank of India. Then, irrespective of anything contained in the Act and subject to the conditions that may be notified by the Central Government:
- (a) the capital gains arising from the conversion are not chargeable to tax in the tax year in which the conversion takes place; and
- (b) the provisions of the Act relating to (i) treatment of unabsorbed depreciation and set off or carry forward and set off of losses, (ii) tax credit in respect of tax paid on deemed income relating to certain companies, and (iii) computation of income of the foreign company and the subsidiary Indian company, apply with such exceptions, modifications and adaptations as are specified in that notification.
What the Central Government has notified, and the terms of the Reserve Bank of India scheme, are not in the text consulted. No condition is stated here.
Sub-section (2): failure to comply
If any condition specified in the scheme or in the notification is not complied with, all the provisions of the Act apply to the foreign company and the subsidiary Indian company without any benefit, exemption or relief under sub-section (1).
Sub-section (3): benefit already allowed
Where a benefit, exemption or relief was claimed and granted for a tax year under sub-section (1) and there is later a failure to comply, then:
- the benefit, exemption or relief is deemed to have been wrongly allowed;
- the Assessing Officer may, irrespective of anything in the Act, re-compute the total income for that tax year and make the necessary amendment; and
- section 287 applies so far as may be, with the period of four years in its sub-section (8) reckoned from the end of the tax year in which the failure takes place.
The general power of rectification is explained in our post on section 287, rectification of mistake.
Sub-section (4): Parliament
Every notification under section 219 must be laid before each House of Parliament.
Section 220: foreign company said to be resident in India
Sub-section (1): the power to adapt
Section 220(1) applies where a foreign company is said to be a resident in India in a tax year and has not been a resident in India in earlier tax years. Then, irrespective of anything in the Act and subject to conditions the Central Government may notify, the provisions relating to the following apply with the exceptions, modifications and adaptations specified in the notification for that tax year:
- (a) computation of total income;
- (b) treatment of unabsorbed depreciation;
- (c) set off or carry forward and set off of losses;
- (d) collection and recovery; and
- (e) special provisions relating to avoidance of tax.
Sub-section (2): later tax years
Where the determination that the foreign company is resident in India was made in assessment proceedings for a tax year, sub-section (1) also applies to any other tax year succeeding it which ends on or before the date of completion of that assessment proceeding.
Sub-sections (3) and (4)
Sub-section (3) mirrors section 219(3). If a benefit, exemption or relief has been granted and there is later a failure to comply with a condition in the notification, it is deemed wrongly allowed. The Assessing Officer may re-compute the total income "as if the exceptions, modifications and adaptation referred to in sub-section (1) did not apply". Section 287 applies so far as may be, and the four years in its sub-section (8) run from the end of the tax year in which the failure occurs. Sub-section (4) requires every notification to be laid before each House of Parliament.
The Act's rules on residence are in section 6; see our post on residential status under section 6.
Comparing the three sections
| Point | Section 218 | Section 219 | Section 220 |
|---|---|---|---|
| Who | Assessee with income of the nature in section 147(3) | Foreign company with a banking branch in India converted into a subsidiary | Foreign company said to be resident in India, not resident earlier |
| Effect | 15% on that income; rest at rates in force | Capital gains on conversion not chargeable; adaptations by notification | Adaptations by notification for five listed subjects |
| Notification needed | No | Yes, for conditions | Yes, for conditions |
| Consequence of default | Not stated in the section | Benefit lost; re-computation within four years | Benefit deemed wrongly allowed; re-computation within four years |
A worked example
The name and amounts are assumed; only the 15% rate and the four-year period are from the Act.
Brightwater IFSC Ltd. has income of the nature referred to in section 147(3) of Rs. 50,00,000 and other income of Rs. 10,00,000 in the tax year.
- Serial number 1: Rs. 50,00,000 x 15% = Rs. 7,50,000
- Serial number 2: Rs. 10,00,000 is charged at rates in force; the Act does not print those rates here, so the amount is not computed
For section 219(3), suppose a conversion relief was granted for a tax year and the failure to meet a notified condition occurs in the tax year ending in March of a later year. The four years in section 287(8) are counted from the end of that later tax year.
Need help with a foreign company or an IFSC unit?
Questions about an IFSC unit, a branch conversion or the residence of a foreign company turn on the notified conditions as well as the statute. Our team can review the structure and conditions through our tax planning advisory service before a return is filed.
Key takeaways
- Section 218 charges income of the nature in section 147(3) at 15% and the rest at rates in force.
- Section 219 relieves capital gains on conversion of a foreign bank's Indian branch into a subsidiary under an RBI scheme, subject to notified conditions.
- Section 220 allows adaptations of the Act for a foreign company said to be resident in India that was not resident before.
- For sections 219 and 220, a later failure of conditions makes the benefit wrongly allowed, with a four-year window for re-computation.
- Notifications under sections 219 and 220 must be laid before Parliament.
Read next
- Sections 212 to 217: special provisions for non-resident Indians
- Sections 221 and 222: securitisation trusts and venture capital undertakings
- Section 287: rectification of mistake
- Chapter XIII: determination of tax in special cases
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.