Section 10AA gives units in a Special Economic Zone (SEZ) a profit-linked deduction on export profits: 100% for the first 5 years, 50% for years 6-10, and 50% for years 11-15 (subject to transferring that amount to the SEZ Re-investment Reserve, SEZRR). Only units that began operations on or before 31 March 2020 qualify (sunset). The deduction does not reduce book profit, so MAT at 15% still applies under Section 115JB.
Section 10AA Deduction — 15-Year Blocks
The benefit runs as a 5 + 5 + 5 block from the first year the unit begins manufacture or provides services from the SEZ. It is available to both manufacturing and service units.
| Block | Years | Deduction | Key condition |
|---|---|---|---|
| Block 1 | Years 1-5 | 100% of export profit | Separate books; export proceeds in convertible forex |
| Block 2 | Years 6-10 | 50% of export profit | Same conditions as Block 1 |
| Block 3 | Years 11-15 | 50% via SEZRR | Amount credited to SEZRR & used within 3 years |
| New units | Started after 31 Mar 2020 | Nil | Sunset — not eligible |
From AY 2026-27 the same deduction continues under Section 144 of the Income-tax Act, 2025 — the balance eligible period and amount are still fixed by the old s.10AA; no fresh cycle restarts.
Introduced by the Finance Act 2016, the 10AA sunset means only SEZ units that commenced operations on or before 31 March 2020 can claim it. Units that began on or after 1 April 2020 get no 10AA deduction, though other non-tax SEZ Act benefits may still apply. Existing units keep claiming for the balance of their 15-year window.
Section 10AA Deduction Formula
The deduction is proportionate to the SEZ unit's export contribution — it is not a deduction of the whole company's profit.
Formula
What counts
Deduction = (Export Turnover of Unit ÷ Total Turnover of Unit) × Profit of the SEZ Business. Export turnover excludes freight, insurance and telecom charges paid in convertible foreign exchange. Separate books must be kept for each SEZ unit.
Running a SEZ unit? Get your 10AA computation, SEZRR and Form 10CCB handled by a CA.
Talk to a Tax Expert →Section 10AA Eligibility Conditions
- Unit set up in a notified SEZ under the SEZ Act, 2005
- Commenced operations on or after 1 Apr 2005 and on or before 31 Mar 2020
- Not formed by splitting up or reconstruction of an existing business
- Used plant & machinery transferred to the unit does not exceed 20% of total P&M
- Separate books of accounts maintained for the SEZ unit
- Return of income filed within the due date under Section 139(1)
- CA report in Form 10CCB filed along with the return
For years 11-15 the 50% deduction is allowed only to the extent profits are credited to the Special Economic Zone Re-investment Reserve (SEZRR). The reserve must be used within 3 years to buy new plant & machinery for the SEZ unit (or other prescribed purposes). If it is not used correctly, the earlier deduction is reversed and taxed in the year of misuse.
MAT Applies — Effective Tax is Not Zero
Section 10AA does not reduce book profit for Minimum Alternate Tax. Even with a 100% regular-tax deduction, a company pays MAT at 15% of book profit (plus surcharge and cess) under Section 115JB — so the effective floor is roughly 15-16%.
| Tax type | 10AA impact | Effective rate |
|---|---|---|
| Regular income tax | Export profit fully sheltered | 0% on eligible profit |
| MAT (Section 115JB) | 10AA not deducted from book profit | 15% + surcharge + 4% cess |
| MAT credit | Carried forward up to 15 years | Set off against regular tax later |
IFSC / GIFT City units are governed by separate exemptions (s.10(4D)/(4E)/(4F)/(4G)) — 10AA does not apply to them.
Section 10AA — Frequently Asked Questions
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Section 10AA — Deduction, SEZRR & MAT Sorted
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