Section 218 Income Tax Act 2025: What Is the Tax Rate for Offshore Banking Units and IFSC Units?
Section 218 provides a special 15% income-tax rate for qualifying income of Offshore Banking Units (OBUs) and units in an International Financial Services Centre (IFSC) referred to in Section 147(3). Other income remains taxable at the rates in force.
What does Section 218 provide?
Where an assessee's total income includes income of the nature referred to in Section 147(3), Section 218 requires income tax to be calculated separately on two components: qualifying income at the special rate of 15%, and the remainder of total income at the rates in force. The amounts are aggregated to determine the income tax payable, subject to other applicable provisions.
Tax rates under Section 218
| Income | Rate of income tax |
|---|---|
| Income referred to in Section 147(3) | 15% |
| Total income reduced by qualifying Section 147(3) income | Rates in force |
Computation approach: Income tax = (qualifying income included in total income x 15%) + (remaining total income x applicable rates). Applicable surcharge, cess and other statutory adjustments must be considered separately.
Which income qualifies under Section 147(3)?
Section 147(3) identifies income from the following categories, subject to statutory conditions:
- Offshore Banking Unit: Income from an OBU located in a Special Economic Zone.
- Specified banking activities: Income from business activities referred to in Section 6(1) of the Banking Regulation Act, 1949, with undertakings in a Special Economic Zone or entities engaged in developing or operating such zones as described in the provision.
- IFSC unit: Income from approved business activities of a unit of an International Financial Services Centre set up in a Special Economic Zone.
- Aircraft or ship transfers: Income from transfer of an aircraft or ship leased by a qualifying IFSC unit, where the unit commenced business operations by 31 March 2030.
These are the statutory categories of income. Whether a particular receipt qualifies requires examination of the unit's approval, business activities, transaction and the full wording of Section 147.
How does the Section 147 deduction interact with Section 218?
Section 147 provides a 100% deduction for qualifying income for specified periods, subject to eligibility and compliance conditions. The Finance Act, 2026 extended the deduction period: generally, 20 consecutive tax years for eligible OBUs and 20 consecutive tax years out of 25 tax years for eligible IFSC units, with special transitional provisions for certain OBUs.
Section 218 prescribes the special rate on qualifying income included in total income. Where income is fully deductible under Section 147, the deduction may mean that no corresponding amount remains in taxable total income for that year. The 15% rate becomes relevant to qualifying income that is taxable, including after the available deduction period ends. It should not be treated as a substitute for, or simultaneous charge on, income fully deducted under Section 147.
Section 147 also contains return-related documentation requirements, including an accountant's report and relevant permission or registration, and conditions for units commencing operations on or after 1 April 2026.
Relevant statutory definitions and concepts
A banking unit operating in a Special Economic Zone within the framework contemplated by Section 147 and applicable banking laws. Eligibility depends on the statutory requirements, not the label alone.
A financial services centre established under the applicable Special Economic Zones framework. Section 147 addresses approved business activities of eligible units in an IFSC.
For Section 147, the term is linked to the definition in Section 2(zc) of the Special Economic Zones Act, 2005, as adopted by the relevant statutory provision.
The tax year determined by the permission or registration milestones described in Section 147(6), relevant to calculating the deduction period.
The tax rates applicable to the remaining income under the Act and relevant charging provisions, depending on the assessee and the nature of that income.
Illustrative tax calculations
Example 1: Qualifying income after deduction period
Assume an eligible IFSC unit has Rs. 80 lakh of qualifying income included in taxable total income after its Section 147 deduction period has expired. The basic income tax attributable to that qualifying income under Section 218 is Rs. 12 lakh (15% of Rs. 80 lakh), before applicable surcharge and cess.
Example 2: Mixed income
Assume total taxable income of Rs. 1 crore comprises Rs. 60 lakh of qualifying Section 147(3) income and Rs. 40 lakh of other income. Basic income tax on the qualifying component is Rs. 9 lakh. Tax on the remaining Rs. 40 lakh must be calculated at the applicable rates in force and then added. This illustration does not assume a particular legal form or rate for the remaining income.
Example 3: Income fully deducted under Section 147
If a unit is eligible for a full deduction of its qualifying income under Section 147 for a tax year and complies with the statutory conditions, that deducted income does not remain in taxable total income for Section 218 to tax. Other taxable income, if any, is dealt with under applicable provisions.
What changed under the Finance Act, 2026?
The Finance Act, 2026 substituted Sections 217 and 218 with effect from 1 April 2026. Previously, Section 218 dealt with a non-resident Indian's election not to apply the special NRI taxation chapter. That election is now addressed in Section 217(2). The substituted Section 218 concerns the 15% taxation of qualifying OBU and IFSC business income. Consequently, articles relying on the former heading or text of Section 218 are outdated for the amended law.
Frequently asked questions
What is the tax rate under Section 218 of the Income-tax Act, 2025?
It is 15% on qualifying income referred to in Section 147(3) that is included in total income. Remaining income is taxed at rates in force.
Does Section 218 apply to all IFSC income?
No. The income must fall within the specified Section 147(3) categories. Other income may be taxed under different provisions.
Is Section 218 the same as the Section 147 deduction?
No. Section 147 provides a deduction for qualifying income during eligible periods, while Section 218 prescribes a special tax rate for qualifying income that forms part of taxable total income.
How long is the Section 147 deduction available?
Under the Finance Act, 2026 amendments, generally 20 consecutive tax years for eligible OBUs and 20 consecutive tax years out of 25 tax years for eligible IFSC units, subject to transitional rules and statutory conditions.
Can an NRI still opt out of the special NRI tax regime?
Yes, subject to the conditions in Section 217(2). This is no longer the subject of Section 218 following the Finance Act, 2026 substitution.
Is the 15% rate inclusive of surcharge and cess?
No. The 15% figure is the statutory basic income-tax rate; applicable surcharge and cess must be examined separately.
Official statutory references
Last reviewed: 11 November 2026. This article provides general legal information. Check the current law, approvals, eligibility and relevant tax year before applying the provisions.