IFSC aircraft-leasing units: CBDT sets dividend TDS relief rules

The Centre has notified a conditional exemption from tax deducted at source (TDS) on dividend payments between aircraft-leasing units in International Financial Services Centres (IFSCs). The Central Board of Direct Taxes (CBDT), in Notification No. 141/2026 dated 4 November 2026, requires the recipient to submit a prescribed declaration before the payer can make or credit qualifying payments without deducting tax.

The notification, published as S.O. 6016(E), is deemed to have taken effect on 1 April 2026. It operates under the Income-tax Act, 2025, and retains a declaration-based arrangement that the CBDT had also prescribed under the Income-tax Act, 1961.

TDS is tax withheld by the payer when making or crediting a payment. The notification addresses that withholding obligation for specified dividends; it is not a blanket exemption for every payment made by an IFSC aircraft-leasing business.

Who qualifies for the exemption

The CBDT notification specifies conditions for both sides of the transaction. The payer must be an IFSC unit primarily engaged in aircraft leasing. The recipient must be a company that is also an IFSC unit primarily engaged in that business.

The notification invokes Section 400(1), read with serial number 11 of the table in Schedule VI of the Income-tax Act, 2025. These are the provisions cited for issuing the withholding exemption and identifying the eligible dividend income. It directs that no tax be deducted under Section 393(1), table serial number 7, when its conditions are met.

The distinction between the income exemption and the withholding exemption matters. Under the notification, the recipient must declare that its dividend income qualifies for exemption under Schedule VI. The prescribed declaration then provides the basis for the payer to apply the no-deduction arrangement.

For its legal definitions, the CBDT notification refers to Note 3 of Schedule VI for “aircraft”. It adopts the meanings of “International Financial Services Centre” and “Unit” from the Special Economic Zones Act, 2005. The notification therefore relies on those statutory definitions rather than setting out a separate description of the businesses covered.

Declaration first, payment reporting still required

The recipient must furnish Form No. 1(N), annexed to the notification, to the payer. The form is a statement-cum-declaration: it records identifying information and contains a formal confirmation of eligibility.

According to the CBDT notification, the declaration must identify the tax year in which the eligible dividend income is payable and must be furnished and verified in the manner specified in the form.

Form No. 1(N) asks for the recipient’s name, Permanent Account Number (PAN), IFSC unit name, unit address, contact number, email address and tax year. It also identifies the person making the declaration and the capacity in which that person acts for the recipient.

The declarant must confirm that the unit is engaged in aircraft leasing and that its dividend income qualifies for the Schedule VI exemption. A further declaration confirms that the unit continues to operate in an IFSC and continues its aircraft-leasing business during the tax year concerned.

The form requires certification that the particulars are correct and complete. It must be signed by a person competent to sign the income-tax return under Section 265 of the Income-tax Act, 2025, the CBDT states.

Receipt of the declaration is the operative trigger. The notification directs the payer not to deduct tax on payments made or credited after the date on which it receives a copy of the recipient’s completed declaration.

The absence of a deduction does not remove the payer’s reporting duty. The CBDT requires particulars of all payments covered by the notification to be included in the statement of tax deduction referred to in Section 397(3)(b), read with Rule 219 of the Income-tax Rules, 2026. Qualifying dividends therefore remain reportable even though tax is not withheld.

How the arrangement compares with the earlier rules

The CBDT had issued a similar conditional exemption through Notification No. 52/2023, S.O. 3254(E), dated 20 July 2023. That notification took effect on 1 September 2023 and also covered dividends between qualifying IFSC aircraft-leasing units.

The earlier notification used Section 197A(1F), read with Section 10(34B), of the Income-tax Act, 1961, to provide relief from deduction under Section 194. It required the recipient to submit Form No. 1 and linked non-deduction to payments made or credited after the payer received that declaration.

The November notification uses Form No. 1(N) and asks for the “tax year”. The earlier form referred to the previous year and the corresponding assessment year. Reporting references have also changed: the earlier notification cited Section 200(3) and Rule 31A of the Income-tax Rules, 1962.

The wider regulatory background predates both tax notifications. In its Framework for Aircraft Lease dated 18 May 2022, updated as on 15 November 2023, the International Financial Services Centres Authority set out registration requirements for entities undertaking aircraft-leasing transactions as finance companies or finance units. That framework also recognised an IFSC entity intending to conduct aircraft leasing solely through wholly owned subsidiaries established in an IFSC.

The tax notification nevertheless sets its own conditions for dividend payments. It does not state that regulatory registration alone satisfies the declaration and income-eligibility requirements.

The CBDT’s explanatory memorandum certifies that giving the November notification retrospective effect does not adversely affect any person. The notification does not, however, specify a separate refund or adjustment process for tax already deducted before the payer received Form No. 1(N).