Section 10AA of the Income-tax Act, 1961 is a profit-linked deduction that lets a unit in a Special Economic Zone (SEZ) deduct a share of its export profits from taxable income for up to 15 years.
It exists because the government wanted SEZ units to earn foreign exchange, so it rewards export earnings rather than domestic sales.
The deduction is generous in the early years and then tapers, and it is now closed to brand-new units after a sunset date.
If you run an IT or ITeS unit inside an SEZ and bill overseas clients, this is the section that decides how much of that profit stays untaxed.
For the receiving side of those export earnings, many SEZ exporters use cross-border payments for service exporters so their foreign inflows land cleanly with proof of realisation.
One quick clarification before we go deeper, because the numbers look alike. Section 10AA (the SEZ export deduction) is not the same as Section 10(10AA), which is the salary exemption for leave encashment.
We cover that confusion below, because it sends a surprising number of people to the wrong provision.
What does the Section 10AA deduction cover?
Section 10AA covers the profits a qualifying SEZ unit earns from exporting goods or services. The deduction is not a flat exemption on all income.
It applies only to the export slice of the unit's profit, worked out through a formula, and only for a defined block of assessment years.
The main features are:
- Who it is for: An entrepreneur, as defined under the SEZ Act, 2005, running a unit set up in an SEZ.
- What it rewards: Profit attributable to export turnover, realised in convertible foreign exchange.
- How long it runs: A 15-year window from the year the unit begins to manufacture goods or provide services.
- How much it gives: 100% of export profit early on, then 50%, then 50% again on stricter terms.
Service exporters, and IT/ITeS units in particular, are the common users here because software and back-office services are treated as exports when billed to and paid by an overseas client.
A business that is not inside an SEZ does not get 10AA at all. It falls under ordinary taxation, or a presumptive scheme such as Section 44AD if it qualifies, which is a different track entirely.
This is the first thing to settle: 10AA is a location-gated benefit, not a general export incentive that any exporter can claim from any office.
It also helps to be clear about what "export profit" means here. The section does not simply exempt turnover. It looks at the profit the unit actually earned and then carves out the export-linked portion of that profit.
A unit that exports heavily but runs at thin margins gets a smaller absolute deduction than one with the same turnover and fatter margins, because the deduction rides on profit, not sales.
How is the Section 10AA deduction calculated?
The deduction is proportional. You take the profit of the unit, scale it by the share of turnover that came from exports, and then apply the percentage allowed for that year. The standard formula is:
Deduction = Profit of the unit × (Export turnover of the unit ÷ Total turnover of the unit) × applicable percentage
Export turnover means the consideration received in, or brought into, India in convertible foreign exchange.
Freight, telecom and insurance attributable to delivering services outside India are typically excluded from export turnover, and if they are excluded from the numerator they are excluded from the denominator too, so the ratio stays fair.
Three practical rules make the calculation cleaner in real books:
- Use the unit's own profit, not the whole company's. If a company runs one SEZ unit and one non-SEZ office, only the SEZ unit's profit feeds the formula, which is why separate books matter.
- Match numerator and denominator. Whatever you strip out of export turnover, strip out of total turnover as well.
- Apply the year's percentage last. Work out the export-profit slice first, then apply 100% or 50% depending on where the unit sits in its 15-year window.
The applicable percentage is what changes across the 15 years, which brings us to the taper.
Section 10AA deduction taper: the 15-year table
The deduction does not stay at 100% for the full period. It steps down in three five-year blocks, and the final block carries an extra condition.
| Period | Deduction on export profit | Condition |
|---|---|---|
| Years 1 to 5 | 100% | Standard eligibility only |
| Years 6 to 10 | 50% | Standard eligibility only |
| Years 11 to 15 | 50% | Allowed only if the amount is credited to a <strong>SEZ Re-investment Reserve Account</strong> and used for new plant and machinery |
For the last five years, the 50% is not automatic.
The unit must credit that reserve out of profits and then use it to buy new plant and machinery, generally within three years, otherwise the amount is pulled back into taxable income.
The reserve cannot be spent on distributing dividends or on assets outside India.
The reserve rule is where good years-11-to-15 claims come apart, so it is worth being deliberate about it.
The steps to hold the deduction in that block are, in order: set aside the claimed amount as a specific SEZ Re-investment Reserve in the accounts, buy new plant and machinery within the allowed window, keep evidence that the asset was actually acquired and put to use, and avoid any prohibited use in the meantime.
Because it is a reserve tied to reinvestment rather than a straight deduction, treating it casually is what usually triggers a clawback later.
Who is eligible for Section 10AA? The eligibility conditions
Eligibility is where most claims are won or lost, because the conditions are strict and each one is tested. A unit generally qualifies when it meets all of the following:
- SEZ location and status: The unit is set up by an entrepreneur in an SEZ under the SEZ Act, 2005, and has begun manufacture or the provision of services within the eligibility window.
- No splitting or reconstruction: The unit is not formed by splitting up or reconstructing a business already in existence.
- No used plant and machinery: It is not formed by transferring old plant and machinery already used, beyond the small tolerance the law permits.
- Convertible foreign exchange: Export proceeds are received in India in convertible foreign exchange, generally within six months from the end of the relevant previous year, or a longer period allowed by the competent authority.
- Separate books: The unit keeps separate books of account so its export profit can be identified cleanly.
- Audit report: A report in Form 56F, from a chartered accountant, is filed to support the claim.
Because realisation in convertible foreign exchange is a hard condition, the way you receive and evidence overseas payments matters as much as the tax working itself.
This is also why tax on inward remittances is worth understanding alongside 10AA, since the two questions travel together for exporters.
A unit that does the tax working perfectly but cannot prove the money came home in foreign exchange within the window is exposed on the very condition that underpins the whole deduction.
The "no splitting or reconstruction" test catches people who assume they can move an existing team into an SEZ shell and switch on 10AA. Setting up a genuinely new unit is the intent.
A cosmetic relocation of an existing business generally is not, and the assessing officer looks at substance, not the signboard.
The Section 10AA sunset clause: can new units still claim it?
No. Section 10AA has a sunset clause. The deduction is available only to units that began operations on or before 31 March 2020.
A unit that started providing services or manufacturing after that date cannot claim 10AA at all, even if it sits inside an SEZ and exports everything it makes.
As of August 2026, that cut-off still stands, though the exact date is worth a live confirmation before you rely on it.
The practical effect is that 10AA is now a benefit that existing SEZ units run down over their remaining years, not one a new entrant can switch on.
If your unit commenced on, say, 1 January 2019, you continue through your 15-year taper.
If it commenced in 2021, the section does not apply to you, and you look instead at ordinary taxation or the concessional corporate-tax routes discussed further down.
This is a common trap for founders scouting SEZ office space today. The tax break they read about in older guides is closed to them.
The SEZ address may still bring operational benefits, but the headline 10AA deduction is not one a post-2020 unit can begin.
Does Section 10AA apply in the new tax regime and the 2025 Act?
Two different "new" questions get mixed up here, so take them separately.
First, the new tax regime for individuals.
Section 10AA is a business deduction earned by a unit, not a salaried exemption, so it is governed by SEZ conditions rather than by an individual's choice between the old and new personal regimes.
A proprietor or firm running an eligible SEZ unit works out 10AA on the unit's profit under the SEZ rules.
Confirm your exact position with a CA, because how the deduction interacts with your overall return depends on your entity type.
Second, the Income-tax Act, 2025, which is set to take effect from 1 April 2026. It carries the SEZ deduction forward through Section 144.
That section preserves the 10AA framework for units that were already eligible: it does not open a fresh 15-year window, and it does not restart the taper.
The remaining eligible period and the amount continue to be worked out on the old 10AA logic.
Treat the section renumbering as a relabelling for existing units rather than a new benefit, and confirm the mapping with your advisor, because the 2025 Act is recent.
The broader rules on tax on foreign income carry over in the same way, so a residency-based question you answered under the old Act keeps its answer.
Worked example 1: an SEZ IT unit computing its year-3 deduction
Take Meridian Softworks, an SEZ software unit in Hyderabad, in year three of operations and comfortably inside the first five-year block.
- Profit of the unit for the year: ₹2 crore
- Export turnover: ₹8 crore
- Total turnover: ₹10 crore (₹2 crore came from domestic work)
Step one, find the export share of profit: ₹2 crore × (8 ÷ 10) = ₹1.6 crore.
Step two, apply the year-three percentage, which is 100%: the deduction is the full ₹1.6 crore. The remaining ₹40 lakh, tied to domestic turnover, stays taxable.
So Meridian shields ₹1.6 crore of profit in year three purely because it is early in the taper and its export mix is high. Now roll the same unit forward to year eight.
The percentage drops to 50%, so the deduction becomes ₹1.6 crore × 50% = ₹80 lakh. Same profit, same export mix, half the shelter, because the taper has stepped down.
The lesson for planning is that the early years are the valuable ones, and a unit should not assume the year-three benefit repeats untouched for a decade.
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Worked example 2: a unit entering the years-11-to-15 reinvestment-reserve phase
Now follow Meridian into year twelve, deep in the final block. Its numbers have grown: profit of ₹3 crore, export turnover ₹18 crore, total turnover ₹20 crore.
Export-profit slice: ₹3 crore × (18 ÷ 20) = ₹2.7 crore. Apply the 50% for this block and the potential deduction is ₹1.35 crore.
But in this block the 50% is conditional.
To hold the ₹1.35 crore, Meridian must credit that amount to a dedicated SEZ Re-investment Reserve Account out of its profits, and then spend it on new plant and machinery, generally within three years.
Suppose Meridian creates the reserve correctly but, two years later, has only bought ₹90 lakh of new equipment and quietly used the rest for working capital.
The shortfall of ₹45 lakh, being reserve that was not reinvested as required, is liable to be pulled back into taxable income in the year the condition fails. The deduction it thought it had banked partly unwinds.
The takeaway is that in years 11 to 15 the deduction is really a deferral tied to a spending promise. A unit that plans genuine capital expenditure ahead of the reserve keeps the full benefit.
A unit that books the reserve as an accounting entry with no real reinvestment behind it is setting up a clawback. Keep the invoices, the asset register and the put-to-use evidence, because that paperwork is what defends the claim.
Worked example 3: a founder choosing between Section 10AA and the 115BAA 22% rate
Section 10AA does not exist in a vacuum.
A company can also elect the concessional corporate-tax rate under Section 115BAA, a flat 22% (plus surcharge and cess), but doing so means giving up most incentive deductions, and 10AA is one of the deductions you forgo if you opt in.
Take Ravi, who runs an SEZ ITeS company still eligible for 10AA in its year-seven block (so 50% on export profit).
His company's profit is ₹5 crore, almost entirely from exports, so the export-profit slice is roughly ₹5 crore and the 10AA deduction at 50% is about ₹2.5 crore. That leaves ₹2.5 crore taxable at the normal company rate.
If instead Ravi elects 115BAA, he pays 22% on the full ₹5 crore, which is about ₹1.1 crore of tax before surcharge and cess, but he cannot claim the 10AA deduction at all.
Staying with 10AA, he taxes only ₹2.5 crore.
At a normal company rate around 25% to 30%, that is roughly ₹65 lakh to ₹75 lakh of tax, which comes out lower than the 115BAA figure while the 10AA benefit still runs.
The point is not the exact rupees, which depend on his real numbers, surcharge, cess and MAT position.
The point is that 115BAA is a one-way election: once you opt in you generally cannot go back, and you lose 10AA in the process.
A unit with strong export profit still inside a favourable taper block often keeps more by staying with 10AA until the deduction runs thin, then electing the concessional rate.
This is exactly the kind of switch to model with a CA before filing, not after.
Founders weighing this alongside other provisions may also look at how Section 115BBH treats specific income streams, since the concessional-rate logic reappears across the Act.
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Worked example 4: confusing Section 10AA with Section 10(10AA) leave encashment
Priya, an HR manager, searches "10AA exemption" while sorting out a retiring employee's leave encashment and lands on SEZ export-deduction guides. Nothing fits, because she is in the wrong provision.
What she actually needs is Section 10(10AA), the salary exemption on leave encashment. That provision exempts, within limits, the amount an employee receives for unused leave on retirement or resignation.
Government employees are treated more generously than non-government employees, and for non-government employees there is a monetary ceiling on the exempt amount, revised by the government from time to time. It is an employee-side exemption on salary income.
Section 10AA, by contrast, is a business deduction claimed by an SEZ unit on its export profit.
The two share the digits "10AA" but sit in different parts of the Act, apply to different taxpayers, and are computed in completely different ways. If your question is about an employee's leave pay, you want 10(10AA).
If it is about an SEZ unit's export earnings, you want 10AA. A quick way to self-check: are you an employer exempting salary, or a unit deducting export profit? The answer tells you which provision to open.
Section 10AA vs Section 10A: what is the difference?
Both give tax breaks for export-oriented units, so they get confused. The simplest split is by location and era.
| Point | Section 10A | Section 10AA |
|---|---|---|
| Applies to | Units in free trade zones, EHTP, STP and similar | Units in SEZs under the SEZ Act, 2005 |
| Status | A holiday of an earlier generation, now closed to new units | Profit-linked deduction, closed to units starting after 31 March 2020 |
| Basis | Export profit over the eligible period | Export profit, tapered over 15 years |
| Current relevance | Largely historical | The live section for existing SEZ units |
For most current SEZ exporters, 10AA is the live section and 10A is history.
If you also want to understand how professionals outside SEZs are taxed, the presumptive route under Section 44ADA is a separate scheme worth reading, and independent professionals often find freelancer income tax rules more relevant to their situation than any SEZ provision.
What Section 10AA does not change: realisation and proof
Section 10AA rewards profit that has actually come home in convertible foreign exchange within the allowed window. It does not relax that condition.
So the deduction is only as safe as your evidence that the money was received, and received on time.
This is the part Xflow helps with, and it is worth being precise about the boundary. Xflow is a cross-border receiving platform, not a tax or CA service, and it does not file your return.
What it does is give you a clean receiving setup for export earnings, with automatic eFIRA generated on inflows, so you hold documented proof of realisation in convertible foreign exchange without chasing your bank for each certificate.
That proof supports both your 10AA position and routine FEMA and EDPMS hygiene.
Xflow holds final RBI PA-CB (Payment Aggregator - Cross Border) authorisation, as of February 2026, and settles through partner AD-1 banks, so the receiving leg is compliant while your CA handles the deduction itself.
Do keep the deduction working and the tax filing with a professional. Where your reading of the section is close, ask a chartered accountant, especially on the reserve rules and the Form 56F report.
If an overseas client also deducted tax at source, that is a separate matter of withholding tax and any credit you can claim for it, which you would document with a tax residency certificate rather than through 10AA.
What is Form 56F and why does it matter?
Form 56F is the chartered accountant's report that supports a Section 10AA claim. Without it, the deduction is exposed, because the form is the auditor's certification that the export profit, the turnover ratio and the eligibility conditions have been checked.
It travels with the return for the year in which the deduction is claimed.
Three things make Form 56F easier to file and harder to challenge. Keep the unit's books genuinely separate so the auditor can trace export turnover to invoices and realisation.
Hold clean, dated proof that each export payment was realised in convertible foreign exchange within the window.
And reconcile the reserve entries in years 11 to 15 to actual plant and machinery purchases, so the report is not certifying a reserve that reality has not backed up.
The invoice trail matters here too, so keep your proforma invoice vs tax invoice documentation tidy, since the tax invoice is what ties the export to the realised payment.
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Frequently asked questions
No. Section 10AA is the SEZ deduction on a business unit's export profits. Section 10(10AA) is a salary exemption for leave encashment received by an employee. They are different provisions that happen to share digits.
No. The deduction is available only to units that began operations on or before 31 March 2020. Units that commenced after that date cannot claim it, even if they export fully from within an SEZ.
Multiply the unit's profit by the ratio of export turnover to total turnover, then apply the year's percentage: 100% in years 1 to 5, 50% in years 6 to 10, and 50% in years 11 to 15 through a reinvestment reserve.
It depends on your numbers. Electing 115BAA means giving up 10AA. A unit with strong export profit still early in its taper often keeps more by staying with 10AA, then switching later. Model both with a CA before filing.
Section 10AA is a business deduction governed by SEZ conditions rather than the salaried regime choice. For existing units, the Income-tax Act, 2025 carries the framework forward via Section 144 from 1 April 2026. Confirm your position with a CA.
Form 56F is the chartered accountant's report that supports a Section 10AA claim. Filing it, keeping separate books and realising export proceeds in convertible foreign exchange are all needed to hold the deduction.
Yes. Export proceeds generally must be realised in convertible foreign exchange within six months of the previous year's end, or a longer period if allowed. Clean, dated proof of realisation is central to the claim.
