Section 10AA — SEZ Tax Deduction on Export Profits

Updated: 3 June 2026 | Income-tax Act, 2025 | SEZ Act, 2005

Section 10AA provides a profit-linked income tax deduction to units in Special Economic Zones (SEZ): 100% of export profits for the first 5 years, 50% for years 6–10, and 50% with SEZRR reinvestment for years 11–15. Only units that commenced operations on or before March 31, 2020 are eligible. The deduction does not reduce book profit — MAT still applies at 15%.

15-Year Window

5 + 5 + 5 year block deduction structure from first year of export
Clock starts from the year the unit begins manufacture/service from SEZ. Applicable to both manufacturing and service units.

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Sunset Clause — Budget 2019: Units that started operations after March 31, 2020 are not eligible for Section 10AA. Units within their 15-year window (started before April 1, 2020) continue to claim the deduction for remaining years.

Year-wise Deduction Percentage — Section 10AA

Block	Years	Deduction %	Condition
Block 1	Years 1–5	100% of export profits	Separate books; export turnover in convertible forex
Block 2	Years 6–10	50% of export profits	Same conditions as Block 1
Block 3	Years 11–15	50% transferred to SEZRR	Amount credited to SEZRR; utilised within 3 years

Deduction Calculation Formula

The deduction is proportionate to the export contribution of the SEZ unit to its total turnover.

Section 10AA Deduction Formula

Deduction = (Export Turnover of Unit ÷ Total Turnover of Unit) × Profit of Business

Export Turnover = FOB value received/receivable in convertible foreign exchange
(less: freight, insurance, telecom charges paid in foreign exchange)

Profit of Business = Net profit of the SEZ unit (from separate account)

Example: Export turnover = ₹80L, total turnover = ₹1Cr, unit profit = ₹20L, year = 1.
Deduction = (80/100) × 20L = ₹16L excluded from taxable income.

Eligibility Conditions

#	Condition	Detail
1	SEZ location	Unit established in a notified SEZ under the SEZ Act, 2005
2	Start date	Commenced manufacture/service on or after April 1, 2005 and on or before March 31, 2020
3	Not split/reconstructed	Unit not formed by splitting or reconstruction of existing business
4	New plant & machinery	Used P&M transferred from Indian unit must not exceed 20% of total P&M value
5	Separate accounts	Dedicated books of accounts maintained for the SEZ unit
6	Return filed on time	ITR filed within due date under Section 139(1); late filing forfeits the deduction
7	Form 10CCB	Chartered accountant's report in Form 10CCB must be filed along with the return

MAT Applicability — Critical Planning Point

Section 10AA does not reduce book profit for MAT. Even with 100% regular tax deduction, SEZ units pay MAT at 15% of book profit plus surcharge and cess — making the effective floor tax rate approximately 15.6%.

Tax Type	10AA Impact	Effective Rate
Regular Income Tax	Fully sheltered — zero tax on 10AA deductible profit	0% on eligible export profits
Minimum Alternate Tax (MAT)	10AA deduction not available for MAT calculation	15% of book profit + surcharge + 4% cess
MAT Credit	MAT paid carried forward up to 15 years	Offset against regular tax when regime exits

IFSC Units — Different Provisions Apply

Units in the International Financial Services Centre (IFSC) such as GIFT City are governed by separate exemption provisions — Section 10(4D), 10(4E), 10(4F), and 10(4G) of the Income-tax Act, 2025. These provisions offer more targeted exemptions for financial services income, capital gains on securities, and fund management. Section 10AA does not apply to IFSC units; they have their own dedicated benefit structure.

Frequently Asked Questions

Who qualifies for Section 10AA deduction in India?

To qualify for Section 10AA deduction, a unit must: (1) be set up in a Special Economic Zone (SEZ) notified under the SEZ Act, 2005; (2) have begun manufacturing goods or rendering services on or after April 1, 2005; (3) not have been formed by splitting up or reconstruction of an existing business; (4) not have been formed by transfer of previously used plant and machinery exceeding 20% of total new plant and machinery value; (5) file a return of income within the due date. The benefit is available to units in both manufacturing and service sectors operating from a SEZ.

Is there a sunset clause for Section 10AA — can new units still claim it?

Yes, Section 10AA has an important sunset clause. Only units that began export operations (commenced manufacture or provision of services) on or before March 31, 2020 are eligible for the 10AA deduction. Units that started operations after March 31, 2020 cannot claim this benefit. The sunset was announced in Budget 2019 (Finance (No. 2) Act, 2019). If your unit started after April 1, 2020, Section 10AA deduction is not available, though other SEZ benefits under the SEZ Act itself may still apply.

How is export profit calculated under Section 10AA — what is the formula?

The deduction under Section 10AA = (Export Turnover of the Unit / Total Turnover of the Unit) x Profit of the Business. Here, Export Turnover means consideration received or receivable in convertible foreign exchange for goods or services exported from the SEZ unit (excluding freight, insurance, telecom charges, and certain other charges paid in foreign exchange). Total Turnover is the total sales/services of the SEZ unit. The profit figure is the profit of the eligible business — not the total profit of the company. Separate books must be maintained for each SEZ unit.

What is the Special Economic Zone Reinvestment Reserve (SEZRR)?

The Special Economic Zone Reinvestment Reserve (SEZRR) is a reserve required to claim the 50% deduction available in years 11-15 under Section 10AA. In years 11-15, the deduction is limited to 50% of profits that are transferred to the SEZRR account. The amount credited to SEZRR must be utilised within 3 years for: acquiring new plant and machinery for the SEZ unit, or for any other purposes prescribed. If the reserve is not utilised properly, the deduction is reversed and taxed in the year of misuse. The SEZRR provides a mechanism to ensure reinvestment of profits back into the SEZ business.

Does Minimum Alternate Tax (MAT) apply to Section 10AA units?

Yes, MAT (Minimum Alternate Tax) applies to SEZ units claiming Section 10AA deduction. The Section 10AA deduction does NOT reduce book profit for the purpose of computing MAT liability under Section 115JB. So even if a company pays zero regular income tax due to 10AA, it will still pay MAT at 15% of book profit (plus surcharge and cess). This is a critical planning point — effective tax rate for 10AA units is not zero but roughly 15%+ due to MAT. MAT credit (MAT credit entitlement) can be carried forward and set off when regular tax exceeds MAT in future years.

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