Legal Reference
Section 10AA equivalent in ITA 2025 (SEZ unit deduction), Section 81IB/IBA, ITA 2025 | Special Economic Zones Act, 2005 | Sunrise sectors — IFSC GIFT City benefits
1. What is an SEZ?
A Special Economic Zone (SEZ) is a geographically demarcated area within India that operates under a different, more liberal economic and tax framework than the rest of the country. SEZs were introduced under the Special Economic Zones Act, 2005 to promote exports and attract foreign investment. Units operating in SEZs receive significant income tax benefits under the Income Tax Act, 2025 — primarily a profit-linked deduction for export earnings.
2. Tax Deduction for SEZ Units: Section 10AA Equivalent
Under ITA 2025, a unit established in an SEZ and deriving export turnover is eligible for a deduction on profits from exports. The deduction structure (for units approved before the sunset date):
| Years of Operation | Deduction on Export Profits |
|---|
| First 5 years | 100% of export profits |
| Next 5 years (years 6-10) | 50% of export profits |
| Next 5 years (years 11-15) | 50% of export profits reinvested in SEZ — subject to conditions |
Sunset Clause
The 100% SEZ deduction for new units was effectively curtailed for units commencing manufacturing/services after 31 March 2020 — they are subject to MAT. Units that started before this date continue to enjoy benefits. New SEZ developments especially IFSC (International Financial Services Centre) at GIFT City, Gandhinagar, have separate and continuing incentives.
3. GIFT City IFSC: Active Tax Benefits
GIFT City International Financial Services Centre (IFSC) has the most comprehensive and currently active tax benefits for financial services:
- 100% deduction of profits for any 10 consecutive years out of the first 15 years for IFSC units
- Transactions in GIFT IFSC: No STT, no CTT (Commodities Transaction Tax)
- Dividends paid by IFSC unit companies: exempt from dividend distribution obligations
- Interest income earned by non-residents on foreign currency deposits with IFSC banking units: exempt
- Capital gains on specified securities traded on IFSC exchanges: exempt
4. SEZ Developer Benefits
Not just units — SEZ developers also get tax benefits:
- 100% deduction on profits from developing, operating, and maintaining the SEZ for 10 years (out of first 15 years)
- Exemption from customs duty on goods required for development
- Domestic procurement treated as deemed exports
5. Minimum Alternate Tax (MAT) in SEZ
SEZ units are subject to MAT under Section 206 of ITA 2025. MAT at 15% applies on book profits even when the SEZ deduction brings taxable income to zero. MAT credit can be carried forward for 15 years and utilised when normal tax exceeds MAT in a future year. IFSC units were exempt from MAT until 31 March 2024 — check current CBDT circulars for the latest position.
6. Export Turnover Computation
The deduction is on export profits — not total profits. Export profits = (Total profits × Export turnover) ÷ Total turnover. Only profits attributable to exports qualify. Expenses incurred wholly for exports are deducted from export turnover before computing the ratio. Accurate bifurcation of domestic and export revenues is critical for correct deduction computation.
7. Why TaxClue
SEZ and IFSC tax incentives are complex — unit eligibility, profit bifurcation, MAT applicability, and compliance with SEZ Act simultaneously. TaxClue provides complete SEZ tax advisory, deduction computation, and ITR filing for SEZ units. Contact us for SEZ tax compliance under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
What tax benefits does an SEZ unit get?
An SEZ unit that derives export turnover can claim a deduction on export profits under Section 10AA equivalent of ITA 2025: 100% for the first 5 years, 50% for years 6-10, and 50% (subject to reinvestment condition) for years 11-15. This effectively reduces or eliminates income tax on export earnings for up to 15 years. However, MAT at 15% on book profits applies even when regular tax is zero.
What are the tax benefits at GIFT City IFSC?
GIFT City IFSC units enjoy: 100% profit deduction for any 10 consecutive years out of the first 15 years; no STT or CTT on IFSC exchange transactions; exempt dividends from IFSC units; exempt interest on foreign currency deposits with IFSC banking units; and capital gains exemption on specified IFSC securities. IFSC is designed to attract international financial services business to India with a globally competitive tax regime.
Is an SEZ unit subject to MAT?
Yes. SEZ units are subject to Minimum Alternate Tax (MAT) under Section 206 of ITA 2025 at 15% on book profits, even when the SEZ profit deduction reduces regular income tax to zero. The MAT paid can be carried forward as MAT credit for 15 years and offset against regular tax in future years when regular tax exceeds MAT. This ensures SEZ units pay at least a minimum level of tax during their deduction period.
How is the SEZ export profit deduction computed?
The deduction is not on total profits but only on the export profits portion: Deduction = (Total profits × Export turnover) ÷ Total turnover. Only the profit attributable to export sales qualifies. If a unit has Rs 50L total profit, Rs 80L export turnover, and Rs 1 crore total turnover, export profit = Rs 50L × 80% = Rs 40L. In the first 5 years, 100% of Rs 40L = Rs 40L is deductible. Accurate revenue bifurcation is essential.
Can a new unit still get SEZ benefits in 2026?
New SEZ units commencing manufacturing/services after 31 March 2020 are subject to MAT. However, IFSC units at GIFT City continue to offer the full 10-year deduction for new units without a sunset clause restriction as of Tax Year 2026-27. Other SEZ units set up before the sunset date continue to enjoy remaining years of their deduction period. Check CBDT circulars and the latest SEZ Act notifications for current eligibility.
