Union Budget 2026 Doubles Tax Holiday for IFSC Units to 20 Years
The Union Budget 2026 has introduced significant tax reforms for companies operating from International Financial Services Centres (IFSCs), particularly in Gujarat's GIFT City. In a major boost to India's global financial hub, the tax holiday period has been extended from 10 years to 20 years, providing entities with two decades of tax-free operations.
Reduced Post-Holiday Tax Rate Enhances Long-Term Viability
Beyond the extended tax holiday, the budget has also reduced the tax rate applicable after the holiday period concludes. Companies will now pay only 15% tax on profits once their tax-free period ends, compared to the previous rates ranging between 25% and 35%. This dual benefit of longer tax exemption followed by lower taxation creates a compelling proposition for financial institutions.
The timing of this extension is particularly strategic, as the first wave of IFSC entities established in 2015 were approaching the end of their original 10-year tax holiday in 2025. This move immediately addresses concerns about competitiveness and provides much-needed tax certainty for existing operations.
Banks Emerge as Primary Beneficiaries of Extended Benefits
While all licensed units in IFSC—including banks, insurance firms, stock exchanges, fund managers, finance companies, and aircraft leasing entities—qualify for the 20-year tax benefit, banks stand to gain the most. Major financial institutions like State Bank of India, ICICI Bank, Federal Bank, and IndusInd Bank were among the early movers to GIFT IFSC in 2015, making them direct beneficiaries of this extension.
Dipesh Shah, executive director at IFSCA, emphasized the importance of this development: "Banks are bringing global borrowing and lending business to GIFT City, and without tax holidays, this business may shift to Singapore or Dubai. What the government has done correctly is provide long-term certainty and predictability on tax rates."
The banking sector's substantial presence in GIFT IFSC is reflected in the approximately $100 billion in banking assets recorded as of September 2025, according to the latest IFSCA bulletin.
Enhanced Competitiveness Against Global Financial Hubs
The extended tax framework significantly strengthens GIFT IFSC's position against established international financial centers like Singapore and Dubai. Suresh Swamy, partner at Price Waterhouse & Co, noted that while several leading IFSCs require periodic renewals of tax benefits every 10 years, GIFT IFSC now offers a one-time, uninterrupted 20-year tax holiday without repeated approval processes.
Swamy further highlighted the operational advantages: "Operating out of GIFT City can potentially reduce overall operating costs by 50-70% compared to other major IFSCs worldwide, providing a compelling advantage from both tax efficiency and operational cost perspectives."
Flexibility for Fund Management Entities
The extended tax holiday introduces greater flexibility for alternative investment funds and fund management entities operating in IFSC. Rahul Jain, partner at Khaitan and Co, explained that while earlier regimes were sufficient for funds with shorter lifespans, the 20-year horizon now allows managers to establish a single fund management entity and launch multiple funds under it over time.
"This enables an entire fund management platform to operate under the tax holiday for up to 20 years," Jain added, noting that several companies previously hesitant about establishing operations in GIFT City have shown renewed interest following the budget announcement.
Current Landscape and Future Prospects
As of September 2025, GIFT IFSC hosted 1,034 registered units, including 37 banks, 194 fund management entities, and 310 alternative investment funds and schemes. The budget provisions mean existing units in their ninth year of operation will receive an additional 11 tax-free years, while new entities registering in GIFT City will enjoy the full 20-year tax holiday from inception.
The current system allows IFSC companies to choose when to avail their tax holiday—either from the start of operations or later when profits become substantial. With the reduced post-holiday tax rate of 15%, companies now have even more strategic flexibility in their tax planning approaches.
This comprehensive tax reform package represents a significant step toward establishing India as a premier destination for global financial services, combining extended tax benefits with operational cost advantages to create a truly competitive international financial services center.
