Aircraft Leasing from IFSC Units: CBDT Notification 74/2026 and the New TDS Control Framework

CBDT Notification No. 74/2026 creates a targeted no-TDS framework for aircraft lease rent and supplemental lease rent paid to eligible lessors located in an International Financial Services Centre (IFSC). For airlines, aircraft operators, finance teams and tax advisers, the change is not simply a rate concession: it creates a document-driven withholding workflow that must be controlled at the payment level.

Issue and background. India has been developing IFSC-based aircraft leasing as a domestic financial-services capability. IFSCA’s aircraft leasing framework recognises aircraft leasing as a financial product and permits registered Finance Companies and Finance Units in an IFSC to undertake operating leases, financial leases and hybrid structures, subject to the applicable regulatory framework. Against that backdrop, CBDT has now aligned withholding mechanics with the tax deduction available to qualifying IFSC lessors.

Applicable law. Notification No. 74/2026, S.O. 3609(E), dated 3 July 2026, has been issued under section 400(1) read with section 147 of the Income-tax Act, 2025. It specifies that no tax is to be deducted under section 393(1), Table serial number 2, on lease rent or supplemental lease rent paid by a lessee to an IFSC Unit for lease of an aircraft, subject to the conditions in the notification. The notification is deemed to have come into force from 1 April 2026.

The relief is conditional, not automatic. The lessor must furnish Form No. 1(N), a statement-cum-declaration, to the lessee. The form identifies the IFSC Unit, PAN, tax year, regulatory permission or registration, and the twenty consecutive tax years for which the lessor opts to claim the section 147 deduction. The declaration must be furnished and verified for each tax year in the opted period.

The lessee’s withholding obligation changes only after receipt of Form 1(N). The notification expressly states that the lessee shall not deduct tax on payments made or credited after the date on which it receives the copy of the declaration from the lessor. This makes the receipt date operationally important. Payments or credits occurring before a valid declaration is received should not be casually swept into the exemption merely because the lessor is otherwise an IFSC entity.

Reporting continues even where deduction stops. The lessee must furnish particulars of payments on which tax has not been deducted under the notification in the statement of deduction of tax referred to in section 397(3)(b), read with rule 219 of the Income-tax Rules, 2026. In other words, a no-TDS position is not a no-reporting position. Tax teams must preserve transaction visibility and reporting discipline even where withholding is switched off.

The twenty-year election also needs active tracking. The relaxation is available only for the twenty consecutive tax years declared by the lessor in Form 1(N), corresponding to the period for which deduction under section 147 is opted. The notification specifically states that the lessee remains liable to deduct tax on aircraft lease rent for any other year. A vendor master that simply marks an IFSC lessor as permanently exempt would therefore create a material compliance risk.

What counts as an eligible lessor? The notification refers to a Unit located in an IFSC and uses the definitions of IFSC and Unit from the Special Economic Zones Act, 2005. Form 1(N) also requires details of the permission or registration obtained under the Banking Regulation Act, the SEBI Act, the IFSCA Act or another relevant law contemplated by section 147. Finance teams should therefore verify the legal identity and regulatory status of the exact contracting lessor, rather than relying only on group branding or an IFSC address.

Why this matters for aircraft leasing transactions. Aircraft leases frequently involve large periodic rentals, supplemental rent, reserves and cross-border or IFSC structures. A withholding error on recurring payments can accumulate quickly. The practical value of Notification 74/2026 is therefore significant, but only where tax, treasury, legal and accounts-payable teams treat the notification as a controlled process rather than a blanket exemption.

Practical control 1 — create a tax-year-specific Form 1(N) register. Record the date of receipt, PAN, IFSC Unit name, regulatory registration reference, opted tax-year window and the authorised signatory. The system should block no-TDS treatment until the declaration is actually received and validated.

Practical control 2 — map the contract payment types. The notification covers lease rent and supplemental lease rent for lease of an aircraft. Teams should map each payment stream under the lease agreement to the notification instead of assuming that every amount paid to the lessor automatically qualifies. Maintenance services, reimbursements, financing charges or separate service arrangements may require independent analysis depending on their legal character and contractual documentation.

Practical control 3 — reconcile withholding and reporting. Each payment on which tax is not deducted should still flow into the prescribed TDS reporting process. Monthly accounts-payable data, lease schedules and the quarterly tax statement should be reconciled so that exemption treatment does not create unexplained gaps in statutory reporting.

Practical control 4 — monitor the twenty-year period and continuing eligibility. The lessor declares the period for which section 147 deduction is opted and also declares that the IFSC Unit continues to operate in the IFSC and continues the relevant business during the tax year. Annual refresh of the declaration and regulatory status should therefore be embedded in the compliance calendar.

Practical control 5 — preserve an audit file. The file should contain the executed lease agreement, amendments, payment schedule, Form 1(N), evidence of the date of receipt, regulatory-registration evidence, withholding analysis, reporting reconciliation and management approval for the tax treatment. This is particularly important for high-value aviation transactions where the quantum of tax exposure can be substantial.

Broader professional takeaway. Notification 74/2026 is part of a wider shift under the Income-tax Act, 2025 toward targeted, declaration-based withholding relief for specified IFSC activities. The core lesson is that exemption eligibility increasingly depends on structured data, tax-year elections and reporting controls. Tax functions should therefore design process controls at the time of onboarding the IFSC lessor rather than trying to reconstruct eligibility during assessment or audit.

Source basis. This analysis is based primarily on CBDT Notification No. 74/2026 / S.O. 3609(E) dated 3 July 2026 and IFSCA’s official Framework for Aircraft Lease, updated as on 26 February 2025.

Disclaimer. This article is intended for professional information only and does not constitute legal, tax or investment advice. Applicability depends on the precise lease structure, payment character, regulatory status of the IFSC lessor, tax year and contemporaneous law. Parties should obtain transaction-specific advice before applying a no-TDS position.