Ship Leasing from IFSC Units: CBDT Notification 75/2026 Rewrites the TDS Workflow

CBDT Notification No. 75/2026 creates a specific non-deduction framework for ship lease rent and supplemental lease rent paid to eligible International Financial Services Centre (IFSC) units under the Income-tax Act, 2025. For shipping groups, treasury teams, tax functions, lessors and lenders, the important point is that the relief is not automatic merely because the lessor operates from an IFSC. The notification creates a documentation-led compliance mechanism in which the timing and validity of Form No. 1(N) directly affect whether the lessee can stop deducting tax.

The legal framework

Notification No. 75/2026, issued on 3 July 2026, was made under section 400(1) read with section 147 of the Income-tax Act, 2025. It specifies that tax is not to be deducted under section 393(1), Table S. No. 2, on payments in the nature of lease rent or supplemental lease rent made by a lessee to an IFSC unit acting as lessor for the lease of a ship, subject to the conditions prescribed in the notification. The notification is deemed to have come into force from 1 April 2026.

Why the relief is conditional, not blanket

The lessor must furnish a statement-cum-declaration in Form No. 1(N) to the lessee. That declaration identifies the twenty consecutive tax years for which the lessor opts to claim the section 147 deduction. The notification further requires the declaration to be furnished and verified for each tax year falling within that twenty-year period.

This matters operationally because the lessee is permitted to stop deducting tax only after it receives the prescribed declaration. A payment made or credited before valid receipt of Form No. 1(N) should therefore not be treated in the same way as a payment made after the declaration is on record. Tax teams should build the declaration date into their withholding-control process rather than relying only on the counterparty’s IFSC status.

What Form No. 1(N) is designed to establish

Form No. 1(N) captures the lessor’s name, PAN, IFSC unit details, address, contact information and relevant tax year. It also asks for the regulatory permission or registration relied upon for determining the relevant tax year, including registration under the Banking Regulation Act, the SEBI Act, the International Financial Services Centres Authority Act, or another relevant law contemplated by section 147. The form records the period for which the section 147 deduction is opted and the initial tax year for which the deduction was claimed.

The declaration additionally confirms that the unit is engaged in the business of leasing a ship, remains an IFSC unit and continues to carry on the relevant business during the tax year for which the declaration is submitted. It must be signed by a person competent to sign the return of income under section 265 of the Income-tax Act, 2025.

The lessee still has a reporting obligation

Non-deduction does not mean non-reporting. Where the lessee does not deduct tax because the notification applies, it must still furnish particulars of the relevant payments in the statement of deduction of tax referred to in section 397(3)(b), read with rule 219 of the Income-tax Rules, 2026. This is an important control point: a treasury team may correctly apply a nil-withholding outcome and still create a compliance failure if the underlying payment is omitted from the prescribed statement.

The twenty-year boundary must be monitored

The notification makes the relaxation available only during the twenty consecutive tax years declared by the lessor for which the section 147 deduction is opted. For any other year, the lessee remains liable to deduct tax on lease rent. In long-duration leasing structures, this creates a clear contract-administration risk: the commercial lease period and the tax-relief period may not always end on the same date.

Practical controls for shipping groups and finance teams

A robust withholding process should not simply code all IFSC ship lessors as permanently exempt. Instead, the vendor master should record the specific IFSC unit, PAN, regulatory registration, Form No. 1(N) receipt date, selected twenty-year period and the tax year for which the current declaration is valid. Payment systems should block the no-TDS treatment where the annual declaration has not been received or where the declared period has expired.

Groups with multiple special-purpose lessors should also avoid applying one unit’s declaration across other entities merely because they belong to the same group. The notification is drafted around payment to a person being an IFSC unit as lessor, and Form No. 1(N) is unit-specific. Entity-level and unit-level validation therefore remain essential.

Contract drafting and transaction documentation

New ship leases involving IFSC lessors should allocate responsibility for timely delivery of Form No. 1(N), renewal of the annual declaration, notification of any loss of eligibility and reimbursement of tax or interest exposure if the declaration is inaccurate. Finance and legal teams should also align the lease definition with the notification’s concept of ship lease rent and supplemental lease rent, and retain the documentation supporting why the payment falls within the notified category.

Audit and controversy readiness

For tax-audit and assessment purposes, the defence of a no-TDS position should be evidence-driven. A practical file should contain the executed lease, invoice trail, lessor’s IFSC and regulatory documents, PAN, annual Form No. 1(N), proof of the date on which the lessee received it, payment ledger, withholding determination and reconciliation with the TDS statement. The date-of-receipt evidence is particularly important because the notification links the lessee’s obligation not to deduct tax to receipt of the declaration.

Key takeaway

Notification No. 75/2026 is a meaningful tax-friction reduction measure for the IFSC ship-leasing ecosystem, but it is best understood as a controlled non-deduction regime rather than an unconditional exemption from withholding administration. The commercial benefit depends on disciplined annual declarations, clear twenty-year tracking, accurate payer reporting and strong audit documentation.

Disclaimer

This article is for general professional information only and does not constitute tax, legal or investment advice. The applicability of Notification No. 75/2026, section 147 and the withholding provisions of the Income-tax Act, 2025 should be evaluated with reference to the facts, regulatory status and documentation of each transaction.