CBDT Exempts TDS on Aircraft and Ship Lease Payments to IFSC Units

NOTIFICATION NO. 74/2026 & NOTIFICATION NO. 75/2026, Dated 3-7-2026

The Central Board of Direct Taxes (CBDT) has issued two notifications providing relief from tax deduction at source on lease payments made to eligible units located in an International Financial Services Centre (IFSC).

The notifications specify that no tax shall be deducted under Section 393(1) [Table S. No. 2] of the Income-tax Act, 2025, on lease rent or supplemental lease rent paid by a lessee to an eligible IFSC Unit engaged in the business of leasing aircraft or ships.

1. Exemption from TDS on Aircraft Lease Payments

CBDT has provided that no tax is required to be deducted on lease rent or supplemental lease rent paid to an eligible IFSC Unit engaged in the business of aircraft leasing.

This relief is available where the IFSC Unit satisfies the prescribed conditions and opts to claim deduction under Section 147 of the Income-tax Act, 2025.

2. Exemption from TDS on Ship Lease Payments

A similar exemption has been provided for lease rent or supplemental lease rent paid to an eligible IFSC Unit engaged in the business of ship leasing.

Accordingly, lessees making payments to qualifying IFSC ship leasing units will not be required to deduct tax, subject to compliance with the prescribed conditions.

3. Condition to Claim Deduction Under Section 147

The benefit is available only where the eligible IFSC Unit opts to claim a deduction under Section 147.

The lessor must specify the period for which the deduction has been opted and comply with the prescribed declaration requirements.

4. Statement-Cum-Declaration in Form No. 1(N)

To avail the benefit, the lessor is required to furnish a statement-cum-declaration in Form No. 1(N) to the lessee.

The declaration must specify the twenty consecutive tax years for which the lessor has opted to claim a deduction under Section 147.

5. Annual Furnishing and Verification Requirement

The statement-cum-declaration must be furnished and verified in the prescribed manner for each relevant tax year.

This ensures that the TDS exemption is linked to a valid and timely declaration by the eligible IFSC Unit.

6. Obligation of Lessee After Receiving Declaration

Upon receipt of Form No. 1(N), the lessee shall not deduct tax on lease rent or supplemental lease rent paid or credited to the lessor.

However, the lessee is required to report such payments in the TDS statement under Section 397(3)(b) read with Rule 219 of the Income-tax Rules, 2026.

7. Exemption Limited to Declared Twenty Consecutive Tax Years

The exemption from tax deduction will be available only for the twenty consecutive tax years declared by the lessor in Form No. 1(N).

For any tax year outside the declared period, tax will be required to be deducted on lease rent payments in accordance with the applicable provisions.

8. Effective Date

The notifications are deemed to have come into force from 1 April 2026.

Accordingly, the TDS exemption applies from the beginning of the relevant tax year, subject to fulfilment of the prescribed conditions.

9. Systems and Procedural Framework

The notifications authorise the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) to prescribe procedures, formats and standards for implementation.

This includes procedures for:

• Secure data capture;
• Transmission of information;
• Document upload;
• Security controls;
• Archival; and
• Retrieval policies.

10. Objective of the Notifications

The notifications seek to:

• Promote aircraft and ship leasing activities from IFSCs;
• Reduce withholding tax friction for eligible IFSC Units;
• Provide certainty to lessees making lease payments;
• Align tax compliance with the Section 147 deduction framework; and
• Strengthen reporting through prescribed declarations and TDS statements.

11. Key Takeaway

CBDT has exempted TDS on lease rent and supplemental lease rent paid to eligible IFSC Units engaged in aircraft or ship leasing, provided the unit opts for deduction under Section 147 and furnishes Form No. 1(N) to the lessee. The exemption is available only for the twenty consecutive tax years declared by the lessor and is deemed effective from 1 April 2026.

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