What Is Section 10AA and Which SEZ Units Can Still Claim the Tax Deduction?
- Author:
- Manoj Sharma
- Verified by:
- Editorial team
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Short answer
Section 10AA of the Income-tax Act, 1961 gives an SEZ unit a deduction on export profits for 15 years: 100% for five years, 50% for five years, then up to 50% if credited to a reinvestment reserve. Only units that began operations before the 2020 sunset qualify. From tax year 2026-27, section 144 of the Income-tax Act, 2025 continues it.
| Applies to | Governed by | Deadline | Penalty | Last verified |
|---|---|---|---|---|
| Entrepreneurs holding a letter of approval for a Unit in a Special Economic Zone that began to manufacture, produce or provide services from assessment year 2006-07 and before the 2020 sunset | Section 10AA of the Income-tax Act, 1961 up to tax year 2025-26 (AY 2026-27); section 144 of the Income-tax Act, 2025 from tax year 2026-27; Special Economic Zones Act, 2005 | Return filed by the due date; export proceeds received in convertible foreign exchange within six months from the end of the year, or a longer period the competent authority allows | Not applicable as a separate penalty; the deduction is denied, and misused or unused reserve amounts are taxed as profits | 9 Oct 2026 |
What is the Section 10AA deduction for SEZ units?
The Section 10AA deduction is a profit-linked tax deduction for the export profits of a Unit set up in a Special Economic Zone. It was inserted into the Income-tax Act, 1961 by the Second Schedule to the Special Economic Zones Act, 2005. The deduction runs for 15 consecutive assessment years from the year the Unit begins operations.
- Who: An entrepreneur, which the SEZ Act section 2(j) defines as a person granted a letter of approval by the Development Commissioner under section 15(9).
- What income: Profits and gains derived from the export of articles, things or services, including computer software, by the Unit. On-site software development outside India is deemed to be export, under Explanation 2 to section 10AA.
- How much: 100% of export profits for the first five years, 50% for the next five years, and for the last five years up to 50% of the profit credited to a Special Economic Zone Re-investment Reserve Account, under section 10AA(1).
- New Act: From 1 April 2026, section 144 of the Income-tax Act, 2025 allows the same deduction, calculated as per section 10AA, for the tax years it would have been allowed had the 1961 Act not been repealed.
Section 10AA is a deduction, not a full exemption of the Unit's income. Only the export share of the Unit's profits qualifies, and the deduction is lost if conditions such as timely return filing and receipt of export proceeds are not met. For how SEZ units handle payments and reporting under FEMA, see SEZ and EOU payment rules.
Who can claim the Section 10AA deduction in 2026?
The Section 10AA deduction can be claimed only by an SEZ Unit that began to manufacture, produce or provide services before the sunset date. The Finance Bill 2016 memorandum set the rule that units starting on or after 1 April 2020 get no deduction, and the Finance Bill 2023 memorandum records that this was extended to 30 September 2020 under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.
| Entity type | Applicable | Why | Best for |
|---|---|---|---|
| SEZ Unit that began operations between AY 2006-07 and the 2020 sunset | Yes, for the unexpired part of its 15-year block | Meets the commencement condition in section 10AA(1) | Existing SEZ IT and service units still inside their 15 years |
| SEZ Unit that began operations after the sunset | No | The 2016 phase-out removed the deduction for units starting from 1 April 2020 (extended to 30 September 2020) | New SEZ units checking whether a profit deduction is available |
| Freelancer or exporter working from home or a regular office | No | Section 10AA needs a Unit in an SEZ approved under the SEZ Act | Independent service exporters, who should look at regular or presumptive taxation |
| Unit converted from a free trade zone or export processing zone | Limited | The period counts from the year it began in the old zone, under the provisos to section 10AA | Older units with a history in a free trade or export processing zone |
| Unit that already claimed section 10A for ten years before the SEZ Act | No | The Explanation in section 10AA bars a second deduction | Long-established units |
How does an SEZ unit claim the Section 10AA deduction?
An SEZ unit claims the Section 10AA deduction in its income tax return, supported by an accountant's report and proof that export proceeds were received. From tax year 2026-27 the claim is made under section 144 of the Income-tax Act, 2025, with the amount still worked out as per section 10AA.
- Confirm the Unit's first year of operations and count where the current year falls in the 15-year block.
- Work out business profits of the Unit and split out export profits in the ratio of export turnover to total turnover.
- Exclude from export turnover any freight, telecommunication charges or insurance for delivery outside India, and foreign exchange expenses for services rendered outside India.
- Check that export proceeds were received in, or brought into, India in convertible foreign exchange within six months from the end of the year, or within an extended period allowed by the competent authority.
- In years 11 to 15, debit the profit and loss account and credit the Special Economic Zone Re-investment Reserve Account with the amount you intend to claim.
- Get the accountant's report and file the return of income on or before the due date.
Which law applies to the Section 10AA claim after 1 April 2026?
The Income-tax Act, 2025 came into force on 1 April 2026 under section 1(3), and section 536 repealed the 1961 Act while saving proceedings for tax years beginning before that date. So a claim for FY 2025-26 (AY 2026-27) is made under section 10AA, and a claim for tax year 2026-27 onward is made under section 144.
- Tax year 2025-26 and earlier: section 10AA of the Income-tax Act, 1961.
- Tax year 2026-27 and later: section 144 of the Income-tax Act, 2025, computed as per section 10AA.
What report does an accountant give for the Section 10AA claim?
Section 10AA(8) applies section 10A(5), which requires an accountant's report. Under rule 16D of the Income-tax Rules, 1962 this report is in Form No. 56F. For tax year 2026-27 onward, check the form prescribed under the Income-tax Rules, 2026 with your tax adviser.
How is the Special Economic Zone Re-investment Reserve used?
The reserve must be used to buy machinery or plant first put to use within three years after the year the reserve was created, under section 10AA(2). Until then it can be used only for the Unit's business, not for dividends, profit remittance abroad or assets outside India.
- Particulars of the machinery or plant go with the return for the year it is first put to use.
- Amounts misused are taxed as profits in the year of misuse.
- Amounts not used within three years are taxed in the year after that period.
What conditions and deadlines apply to the Section 10AA deduction?
The Section 10AA deduction depends on timely return filing, timely receipt of export proceeds and proper use of the reserve. The Finance Bill 2023 memorandum explains that from AY 2024-25 the return must be filed by the due date under section 139(1) and proceeds must arrive within six months from the end of the previous year.
| Condition | Rule | Source | Best for |
|---|---|---|---|
| Return filing | Return of income on or before the due date under section 139(1), from AY 2024-25 | Finance Bill 2023 memorandum, clauses 6 and 74 | Units that file close to the deadline |
| Export proceeds | Received in or brought into India in convertible foreign exchange within six months from the end of the previous year, or a further period allowed by RBI or the authorised authority | Finance Bill 2023 memorandum, clauses 6 and 74 | Units with slow-paying foreign clients |
| Proceeds received late | Assessment can be amended to allow the deduction when the money later arrives in India | Section 288(1) Table Sl. No. 6, Income-tax Act, 2025 | Units whose deduction was denied for late receipt |
| Reserve use | Machinery or plant first put to use within three years after the reserve year | Section 10AA(2)(a) | Units in years 11 to 15 |
| Accountant's report | Form No. 56F under rule 16D (1962 Rules) | Income-tax Rules, 1962 | Units claiming for tax year 2025-26 or earlier |
| Amalgamation or demerger | No deduction to the amalgamating or demerged Unit in the year of the scheme; the successor continues | Section 10AA(5) | Units under restructuring |
What happens if an SEZ unit fails a Section 10AA condition?
If an SEZ unit fails a Section 10AA condition, the deduction for that year is not allowed, or reserve amounts are added back to taxable profits. There is no separate fine in section 10AA itself, but the extra tax, interest and any penalty follow the general provisions of the Act.
- Late return: No deduction for that year if the return is not furnished by the due date, as explained in the Finance Bill 2023 memorandum.
- Late proceeds: Export turnover only counts amounts received in, or brought into, India within the allowed period, so the deduction falls for the unrealised part.
- Reserve misuse: Reserve amounts used for other purposes are taxed as profits in the year of misuse, under section 10AA(3).
- Unused reserve: Reserve amounts not used within three years are taxed as profits in the year after the three-year period.
- Wrong regime: Under the default regime in section 202(2)(a)(xii) of the Income-tax Act, 2025, Chapter VIII deductions other than those listed are not allowed, and section 144 sits in Chapter VIII.
If export proceeds arrive after the deadline, the Assessing Officer can amend the assessment to allow the deduction, under section 288(1) Table Sl. No. 6 of the Income-tax Act, 2025, within four years from the end of the financial year the money is received. Keep bank evidence of each receipt and, if needed, seek an extension of the realisation period through your AD bank; see extension of export realisation period.
How is the Section 10AA deduction calculated?
The Section 10AA deduction is the Unit's business profit multiplied by export turnover over total turnover, then multiplied by the rate for that phase, under section 10AA(7). Say a hypothetical SEZ IT unit began services in FY 2019-20, so its first assessment year is 2020-21. In tax year 2026-27 it is in year 8, the 50% phase. Its business profit is Rs 80 lakh, export turnover Rs 4.5 crore and total turnover Rs 5 crore. Export profit is Rs 80 lakh x 4.5 / 5 = Rs 72 lakh. The deduction is 50% of Rs 72 lakh, or Rs 36 lakh, leaving Rs 44 lakh of business profit to be taxed at normal rates. In years 11 to 15, if the same unit credits Rs 30 lakh to the reserve, the deduction is Rs 30 lakh, because the cap would be Rs 36 lakh. All figures are hypothetical.
| Phase | Years in the 15-year block | Deduction | Condition | Best for |
|---|---|---|---|---|
| First phase | Years 1 to 5 | 100% of export profits | Unit begins operations within the eligible window | Claims for tax year 2025-26 or earlier; every eligible unit is past year 5 by tax year 2026-27 |
| Second phase | Years 6 to 10 | 50% of export profits | Same conditions on return filing and receipt of proceeds | Units that began between FY 2017-18 and the 2020 sunset, counted for tax year 2026-27 |
| Third phase | Years 11 to 15 | Amount credited to the reinvestment reserve, up to 50% of export profits | Reserve used for machinery or plant within three years | Units that began between FY 2012-13 and FY 2016-17, counted for tax year 2026-27 |
What mistakes do SEZ units make with Section 10AA?
- Late filing: Filing the return after the due date, which removes the deduction for the year.
- Whole profit: Claiming the deduction on all business profit instead of the export share worked out by the turnover ratio.
- Turnover mismatch: Leaving freight, insurance or telecom charges for delivery outside India in export turnover.
- Old section: Citing only section 10AA in a return for tax year 2026-27, when the claim now sits under section 144 of the Income-tax Act, 2025.
- Regime choice: Choosing a regime that does not allow Chapter VIII deductions while still expecting the section 144 benefit.
- Reserve gaps: Not buying machinery or plant within three years, so the reserve amount comes back as taxable profit.
How did we verify this?
Every rule, deadline and form on this page is linked to its official source, checked on the dates below.
- Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026, Income Tax Department, Sections 1(3), 144, 202(2)(a)(xii) and 202(4), 205(1)(g), 288(1) Table Sl. No. 6, 536(1) and (2)(c) (checked 9 Oct 2026)
- The Income-tax Act, 2025 (No. 30 of 2025), Gazette of India Extraordinary, 21 August 2025, Section 144 as enacted (checked 9 Oct 2026)
- Special Economic Zones Act, 2005, SEZ India (Department of Commerce), Sections 2(j), 2(zc), 15; Second Schedule inserting section 10AA(1) to (9), Explanations 1 and 2 (checked 9 Oct 2026)
- SEZ India FAQs, Incentives for SEZ units: 100%, 50% and 50% ploughed back; sunset for units from 01.04.2020 (checked 9 Oct 2026)
- Finance Bill 2016, Memorandum explaining the provisions, Phasing out of deductions, Table 1, section 10AA: no deduction for units commencing on or after 1 April 2020 (checked 9 Oct 2026)
- Finance Bill 2023, Memorandum explaining the provisions, Specifying time limit for bringing consideration against export proceeds into India (clauses 6 and 74), paras 1 to 8 (checked 9 Oct 2026)
- Income-tax Rules, 1962 (Income Tax Department), Rule 16D, Form No. 56F; rule 16DD, Form No. 56FF (checked 9 Oct 2026)
Frequently asked questions
Can a new SEZ unit set up in 2026 claim Section 10AA?
No. A new SEZ unit set up in 2026 cannot claim Section 10AA, because the deduction is only for units that began operations before the sunset. The Finance Bill 2016 phase-out stopped the deduction for units starting from 1 April 2020, and a later relaxation law extended that date to 30 September 2020.
Can an individual freelancer claim the Section 10AA deduction?
An individual freelancer can claim Section 10AA only if they hold a letter of approval for a Unit in a Special Economic Zone that began operations within the eligible window. A freelancer working from home or a regular office has no SEZ Unit, so the deduction does not apply to their export income.
What is section 144 of the Income-tax Act, 2025?
Section 144 of the Income-tax Act, 2025 is the provision that continues the SEZ unit deduction from tax year 2026-27. It allows a deduction calculated as per section 10AA of the 1961 Act, only for the tax years that section 10AA would have covered had the old Act not been repealed.
Does the Section 10AA deduction cover income from domestic sales by an SEZ unit?
No. The Section 10AA deduction covers only profits derived from export. Export profit is the share of business profit that export turnover bears to total turnover, so profit linked to sales or services into the domestic tariff area stays taxable. Export turnover also excludes freight, insurance and telecom charges for delivery outside India.
When does the last Section 10AA deduction year end?
The last Section 10AA year depends on when each unit began. Since the deduction runs for 15 consecutive assessment years and the latest eligible start was 30 September 2020, the final eligible year for the latest units falls around tax year 2034-35. Confirm your own unit's start year and block with a tax adviser.
Is the Section 10AA deduction available under the new tax regime for individuals?
Section 202(2)(a)(xii) of the Income-tax Act, 2025 computes income under the default regime without Chapter VIII deductions other than those it lists, and section 144 is in Chapter VIII. An individual SEZ entrepreneur would need to exercise the option under section 202(4) to claim it.
Does an SEZ unit need Form 56F for Section 10AA?
Under rule 16D of the Income-tax Rules, 1962, the accountant's report for a Section 10AA claim is in Form No. 56F. That covers claims up to tax year 2025-26. For tax year 2026-27 onward under section 144, check the form number prescribed under the Income-tax Rules, 2026.