Section 10AA of Income Tax Act: Deduction for Units in Special Economic Zones
Section 10AA of the Income-tax Act, 1961 provided a profit-linked deduction to qualifying units established in a Special Economic Zone (SEZ) for profits derived from export of articles, things or services. From 1 April 2026, the Income-tax Act, 2025 applies, and the continuing benefit for eligible units is carried through Section 144 of the new Act.
What is Section 10AA?
Section 10AA was the special deduction provision for an assessee who is an entrepreneur within the meaning of Section 2(j) of the Special Economic Zones Act, 2005 and who operates an eligible unit in an SEZ. The provision applies to profits and gains derived from export of eligible articles, things or services, subject to the statutory conditions.
The original eligibility window required the unit to begin manufacture or production of articles or things, or provision of services, during the previous year relevant to an assessment year commencing on or after 1 April 2006 but before 1 April 2021. Accordingly, the provision is no longer open to a new unit commencing after the statutory sunset, but an eligible unit may still have an unexpired deduction period.
Deduction available under Section 10AA
| Period | Deduction |
|---|---|
| First 5 consecutive assessment years | 100% of eligible profits and gains derived from export. |
| Next 5 consecutive assessment years | 50% of eligible export profits. |
| Next 5 consecutive assessment years | Up to 50% of eligible profit, subject to debit to the profit and loss account, credit to the Special Economic Zone Re-investment Reserve Account and compliance with the prescribed utilisation conditions. |
The deduction cannot exceed the total income computed before giving effect to the deduction. For the applicable years under the 1961 Act, the statutory conditions governing timely filing of the return and other compliance requirements should also be checked for the relevant assessment year.
Main eligibility conditions
An eligible undertaking, being the SEZ unit, must satisfy the conditions laid down in Section 10AA. In substance, the unit must have commenced eligible manufacture, production or services within the statutory commencement window; it must not be formed by splitting up or reconstruction of an existing business, subject to the statutory exception; and it must not be formed by transfer to the new business of machinery or plant previously used for a purpose, subject to the incorporated rules and exceptions.
Section 10AA also contains rules for amalgamation or demerger. In the year of the qualifying amalgamation or demerger, the deduction is not admissible to the amalgamating or demerged unit, while the provision applies to the resulting or transferee unit in the manner contemplated by the section.
Special Economic Zone Re-investment Reserve Account
For the third block of five years, the amount claimed under the reserve mechanism is subject to the statutory ceiling and must be credited to the Special Economic Zone Re-investment Reserve Account. The reserve is intended principally for acquisition of machinery or plant that is first put to use within the prescribed three-year period.
Until acquisition, the reserve may be used for the business of the undertaking, but not for prohibited purposes such as distribution by way of dividends or profits, remittance outside India as profits, or creation of an asset outside India. If an amount is used for an impermissible purpose, or remains unutilised after the statutory period, Section 10AA treats the relevant amount as profits chargeable to tax in the year specified by the provision.
How are eligible export profits calculated?
Section 10AA(7) uses a proportionate formula based on the business profits of the unit, its export turnover and its total turnover:
The statutory definition of export turnover excludes specified items such as freight, telecommunication charges and insurance attributable to delivery outside India, as well as specified foreign-exchange expenditure incurred in rendering services outside India.
Important statutory definitions
Entrepreneur
The expression is linked to Section 2(j) of the Special Economic Zones Act, 2005. The SEZ Act supplies the governing definition used by the income-tax provision.
Export in relation to an SEZ
For Section 10AA, export broadly concerns taking goods or providing services out of India from an SEZ by land, sea, air or another mode, whether physical or otherwise, subject to the statutory wording.
Manufacture, Special Economic Zone and Unit
Section 10AA adopts the relevant meanings assigned under Section 2 of the Special Economic Zones Act, 2005. The statutory definitions should therefore be read together with the SEZ Act when testing eligibility.
Section 144 of the Income-tax Act, 2025 from 1 April 2026
For tax years governed by the Income-tax Act, 2025, Section 144 is the corresponding provision for qualifying newly established SEZ units. It does not create a fresh commencement window. Instead, where an assessee would have been eligible for the deduction under Section 10AA had the 1961 Act not been repealed, Section 144 allows the deduction under the new Act.
The amount is calculated in accordance with Section 10AA of the 1961 Act and is available only for the tax years for which the deduction would have remained available under that old provision. This preserves the balance of the existing incentive period without reopening the sunset for new units.
Under the Income-tax Rules, 2026, the Income Tax Department identifies Form 33 for particulars relating to SEZ units claiming the Section 144 deduction in connection with the SEZ Reinvestment Allowance Reserve Account. The filing requirement should be checked against the taxpayer's particular claim and tax year.
Other provisions referred to by Section 10AA
Section 10AA interacts with several provisions of the 1961 Act, including the rules dealing with carry-forward or set-off of specified losses, the anti-abuse provisions incorporated from Section 80-IA, and the restriction preventing a double deduction for a specified business where a deduction has been claimed and allowed under Section 10AA and Section 35AD is also relevant.
Practical points
Before claiming the deduction, identify the year in which the SEZ unit first began eligible operations, determine which five-year block applies, compute export profits using the statutory turnover formula, and maintain evidence supporting export turnover and business profits. For the reserve-linked years, separately track the reserve, withdrawals, acquisition and first use of qualifying plant or machinery, and the applicable reporting requirement.
Legal update: This article distinguishes the historical Section 10AA framework under the Income-tax Act, 1961 from its continuing treatment under Section 144 of the Income-tax Act, 2025. Tax treatment depends on the relevant tax/assessment year and the transitional provisions.