GIFT City IFSC Tax Rules in 2026: What CBDT Notification 94/2026 and the No-TDS Regime Mean for Your Fund
Quick Summary: The GIFT City IFSC Tax Position in 2026
- CBDT Notification 94/2026 (G.S.R. 646(E), dated 21 July 2026) rewrote the definition of “specified fund” in Rule 157(5) of the Income-tax Rules, 2026, expanding it to cover a wider set of Alternative Investment Funds (AIFs) and IFSCA-regulated funds.
- A fund now qualifies as a “specified fund” if it is a Category I or Category II AIF registered under the SEBI (AIF) Regulations, 2012, or a fund regulated under the IFSCA (Fund Management) Regulations, 2022 and located in any International Financial Services Centre (IFSC).
- This sits on top of two earlier 2026 reliefs: no TDS on specified payments to IFSC units and no TDS on aircraft and ship lease rent paid to IFSC units.
- The backbone remains the Section 80LA tax holiday: a 100% deduction on eligible IFSC-unit income for 10 consecutive years out of the first 15.
- Net effect for 2026: setting up or relocating a fund into GIFT City IFSC is now cleaner on classification and lighter on withholding than it was a year ago.
Why GIFT City Keeps Appearing in Your Clients’ Plans
GIFT City, and specifically the International Financial Services Centre (IFSC) inside it, has moved from a curiosity to a default question in cross-border structuring. Every founder raising an offshore-friendly fund, every family office building a global book, and every lessor of aircraft or ships now asks the same thing: does the IFSC route actually save tax, or is it a brochure? In 2026 the honest answer is that the architecture has become materially more usable, and a run of Central Board of Direct Taxes (CBDT) notifications this year is the reason. This post pulls those changes into one map so you can advise without hunting through five separate circulars.
We have covered individual pieces of this before. This is the consolidated view, anchored on the most recent change: CBDT Notification 94/2026.
Change 1: CBDT Notification 94/2026 Redefines “Specified Fund”
On 21 July 2026 the CBDT issued Notification No. 94/2026 (published as G.S.R. 646(E), F. No. 370142/24/2026-TPL), calling it the Income-tax (Second Amendment) Rules, 2026. It came into force on the date of publication. The operative change is narrow but important: in Rule 157, sub-rule (5), clause (c) was substituted with a new, wider definition of “specified fund”.
Read directly from the notification, a “specified fund” now means:
| Limb | What qualifies |
|---|---|
| (i)(A) | A fund established or incorporated in India as a trust, company, LLP or body corporate, registered as a Category I or Category II AIF and regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 |
| (i)(B) | A fund regulated under the IFSCA (Fund Management) Regulations, 2022 (framed under the IFSCA Act, 2019) and located in any International Financial Services Centre |
| (ii) | Any fund referred to in Schedule VI [Note 1(g)] of the Income-tax Act, 2025 |
Why this matters. “Specified fund” is the gateway term for the concessional fund taxation regime. Getting the definition right decides whether a fund and its non-resident investors sit inside the favourable framework or outside it. By expressly folding in both domestic Category I and II AIFs and IFSCA-regulated fund vehicles located in an IFSC, the CBDT has removed a layer of classification doubt for GIFT City fund managers. For a CA setting up a new fund, the practical takeaway is that IFSCA registration under the 2022 Fund Management Regulations now maps cleanly onto “specified fund” status, rather than leaving you to argue the point.
Change 2: No TDS on Specified Payments to IFSC Units
Earlier in 2026 the CBDT removed the withholding-tax friction that used to make paying an IFSC unit needlessly heavy on cash flow. Under CBDT Notification 80/2026, specified categories of payment made to units in an IFSC are relieved from tax deduction at source, subject to the conditions and the payee-category matrix in that notification. This is a genuine working-capital benefit for anyone routing interest, professional fees or similar payments to an IFSC banking unit, finance company or fund vehicle.
The detail matters here, because the relief is mapped to specific payee categories rather than granted as a blanket exemption. We broke the matrix down in our dedicated explainer: CBDT Notification 80/2026: No TDS on specified payments to IFSC units. Before you stop deducting on any payment, check that both the payee category and the payment type fall inside the notified list.
Change 3: No TDS on Aircraft and Ship Lease Rent to IFSC Units
The IFSC is now the default domestic base for aircraft and ship leasing, and the tax rules have caught up. The CBDT confirmed that lease rent paid to an IFSC unit engaged in aircraft or ship leasing is not subject to tax deduction at source in the notified cases, removing a cash drag on lessees that used to make the IFSC leasing structure less attractive than an offshore one. We covered the mechanics in No TDS on aircraft and ship lease rent paid to IFSC units. For lessors deciding where to domicile a leasing platform, this is one of the strongest arguments for GIFT City over a traditional offshore centre.
The Backbone: The Section 80LA Tax Holiday
None of the above works in isolation. The reason a fund manager, banking unit or lessor sets up in the IFSC in the first place is the profit-linked deduction under Section 80LA. In broad terms, an eligible IFSC unit can claim a 100% deduction on its eligible income for 10 consecutive assessment years out of the first 15, provided the income is received in convertible foreign exchange and the unit meets the operating conditions. The concessional fund regime and the withholding-tax reliefs above are what make that holiday practically capturable, by cutting the leakage that would otherwise eat into the exempt income before it reaches the investor.
The Income-tax Act, 2025, which is in force from 1 April 2026, carries the IFSC unit deduction forward. When you cite the deduction in a fresh AY 2026-27 opinion, refer to the corresponding provision under the 2025 Act and confirm the current section reference against the primary statute rather than reusing an older section number out of habit.
What This Means for Different Readers
| Stakeholder | What to do with the 2026 changes |
|---|---|
| Fund managers | Confirm your vehicle meets the new Rule 157(5)(c) “specified fund” definition; IFSCA (Fund Management) Regulations 2022 registration plus IFSC location now qualifies expressly. |
| CAs and advisors | Refresh client memos: the specified-fund gateway is wider, and two TDS reliefs reduce withholding on IFSC payments. Verify the payee-category conditions before applying either. |
| Aircraft and ship lessors | Model the GIFT City leasing platform with nil TDS on lease rent and the 80LA holiday; compare against your existing offshore base. |
| Founders and family offices | The IFSC fund route is now a cleaner base for a global book; the classification uncertainty that used to require a private ruling is reduced. |
Compliance Checklist Before You Rely on the IFSC Regime
- Confirm registration: Category I or II AIF under SEBI (AIF) Regulations 2012, or a fund under IFSCA (Fund Management) Regulations 2022 located in an IFSC.
- Map your fund against Rule 157(5)(c) as substituted by Notification 94/2026, and keep the registration certificate on file as evidence of “specified fund” status.
- Before switching off TDS on any IFSC payment, check the payee category and payment type against Notification 80/2026 (and, for leasing, the aircraft and ship lease notifications).
- Verify the current Section 80LA-equivalent provision and its conditions under the Income-tax Act 2025 for any AY 2026-27 position.
- Ensure eligible income is received in convertible foreign exchange, which is a condition of the 80LA holiday.
Frequently Asked Questions
What did CBDT Notification 94/2026 actually change?
It substituted clause (c) of Rule 157(5) of the Income-tax Rules, 2026, replacing the old definition of “specified fund” with a wider one that expressly covers Category I and II AIFs under the SEBI AIF Regulations 2012, IFSCA-regulated funds located in an IFSC under the 2022 Fund Management Regulations, and any fund referred to in Schedule VI [Note 1(g)] of the Income-tax Act 2025. It was notified as G.S.R. 646(E) on 21 July 2026 and took effect on publication.
Does an IFSC fund still get a tax holiday?
Yes. The Section 80LA profit-linked deduction, a 100% deduction on eligible income for 10 consecutive years out of the first 15, remains the core incentive, subject to conditions including receipt in convertible foreign exchange. The 2026 notifications make that holiday easier to capture by reducing withholding and classification friction, not by replacing it.
Is there any TDS on payments to a GIFT City unit now?
For the categories notified under CBDT Notification 80/2026, specified payments to IFSC units are relieved from TDS, and lease rent to aircraft and ship leasing units in an IFSC is similarly relieved in the notified cases. These are category-specific reliefs, not a blanket exemption, so you must confirm your payee category and payment type before you stop deducting.
Do these changes apply to Category III AIFs?
The substituted Rule 157(5)(c) definition addressed in Notification 94/2026 speaks to Category I and Category II AIFs and IFSCA-regulated funds. The tax treatment of Category III AIFs in an IFSC runs through a separate set of provisions and conditions, so do not read this notification as settling the Category III position. Check the specific regime that applies to your fund category.
From when do these rules apply?
Notification 94/2026 came into force on its publication date, 21 July 2026. The Income-tax Act 2025 governs from 1 April 2026 (AY 2026-27), so frame any current-year opinion under the 2025 Act and its rules.
The Bottom Line
The GIFT City IFSC story in 2026 is one of friction removal. A wider “specified fund” definition, two withholding-tax reliefs, and a stable 80LA holiday together make the IFSC a more defensible base than it was a year ago. The work for the advisor is no longer arguing that the incentive exists; it is confirming that a specific fund or payment fits inside the notified conditions. Get that mapping right and the 2026 architecture is genuinely usable.
Sources (verified for this article): CBDT Notification No. 94/2026, G.S.R. 646(E), F. No. 370142/24/2026-TPL, dated 21 July 2026, made under section 533 read with section 262 of the Income-tax Act, 2025, was retrieved as the gazette PDF from incometaxindia.gov.in on 25 August 2026 (primary domain) and the substituted Rule 157(5)(c) text was read directly from the instrument. The no-TDS reliefs are covered in our own primary-pinned explainers on Notification 80/2026 and the aircraft and ship lease notifications, linked above. Section 80LA is cited at concept level; confirm the corresponding provision and conditions under the Income-tax Act 2025 before relying on a specific section reference for an AY 2026-27 position.
Planning a fund, leasing platform or unit in GIFT City IFSC, and want to know exactly which reliefs your structure qualifies for? Get expert guidance from Tax Update India. Book a quick call and we will map your vehicle against the 2026 specified-fund definition and the withholding-tax reliefs before you commit.
Disclaimer: This article is for general information only and does not constitute legal, tax or professional advice. Tax incentives depend heavily on entity type, registration, income character and conditions that vary case to case. Verify every position against the primary CBDT notifications and the Income-tax Act 2025, and consult a qualified professional before acting. Tax Update India is a knowledge platform and accepts no liability for action taken on the basis of this article.
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