Section 10AA of the Income Tax Act is a boon for entrepreneurs operating in Special Economic Zones (SEZs) in India. It allows new businesses or units offering services in SEZs to claim substantial tax deductions on profits & gains derived from exports. If you are planning to set up a new venture or have already started operations in an SEZ, this provision can significantly reduce your income tax burden.
Let’s break it down in simple words.
What Is Section 10AA of the Income Tax Act?
Introduced to promote exports and boost India's economic growth, Section 10AA provides tax deductions for businesses that are established in Special Economic Zones. It is part of the special provisions in respect of newly established units in SEZs under the Income Tax Act, 1961.
This section applies only to newly set-up units in SEZs, and entrepreneurs operating in SEZs can claim deductions for profits and gains from exports made out of India. "
What Deductions Are Allowed Under Section 10AA?
According to Section 10AA of the Income Tax Act, the eligible assessee (a company or business operating in an SEZ) is allowed the following deductions:
- 100% of profits and gains derived from exports for the first 5 consecutive assessment years.
- 50% of such profits for the next 5 years.
- For the next 5 years, up to 50% of profits, subject to reinvestment of the same in the business.
Yes, you read that right. A deduction of 100% of profits and gains is allowed for the first five years, which means you can save big on taxes if your business qualifies.
Who Can Claim Deduction Under Section 10AA?
This deduction can be claimed by:
- Any newly established unit in a Special Economic Zone (after April 1, 2006).
- Units that are engaged in the export of goods or services.
- Units that do not split or reconstruct an existing business.
- Units that are not formed by transferring used machinery or plant.
So, if you’re starting a fresh venture in an SEZ & meet the above conditions, this section was made for you. "
Key Conditions to Note
Here’s where you need to be careful.
- Books of accounts must be maintained and audited.
- A report from a Chartered Accountant (Form 56F) must be filed.
- Only export income qualifies. Domestic sales income is not eligible for deduction.
- You must file your return on or before the due date under Section 139(1) to claim this benefit.
Why Section 10AA Matters
Let’s say you’ve started an IT service export unit in an SEZ. You make ₹1.5 crore in profit in your first year. Under normal circumstances, you would be taxed heavily. But with Section 10AA, you may get a 100% deduction on ₹1.5 crore, resulting in ZERO income tax for that year.
That’s a massive saving & a huge incentive to expand and reinvest.
What Are Special Economic Zones (SEZs)?
SEZs are designated geographical regions in India that offer favourable tax, regulatory, and infrastructure incentives to promote exports. Think of them as mini-tax havens for Indian entrepreneurs.
From simplified customs to reduced compliance, these zones are tailor-made to support businesses looking to scale globally.
Common Questions on Section 10AA
- What is the sunset clause in Section 10AA?
The sunset clause refers to the last date for setting up a unit in an SEZ to be eligible for this benefit. As per the current provision, only units set up on or before 31st March 2020 were eligible. However, updates are expected, & new amendments might extend the window.
- Can deductions be carried forward?
No. Section 10AA does not allow any carry forward of unclaimed deductions. You either claim it in the eligible year or lose it.
- Can a unit claim both 10AA and 80JJAA?
Yes, both deductions can be claimed if the business satisfies the respective conditions under both sections.
Final Thoughts
Section 10AA of the Income Tax Act is a powerful tax-saving tool for Indian exporters and SEZ businesses. It not only helps reduce tax liability but also encourages the establishment of high-performing businesses within India’s SEZ framework.
If you're an entrepreneur or business planning to operate from an SEZ, this provision can be your best friend, provided you meet the conditions & file on time.
