Section 10AA of the Income Tax Act: SEZ Deduction for Exporters

Section 10AA of the Income Tax Act is the tax holiday that lets a unit in a Special Economic Zone (SEZ) deduct the profits it earns from exports. The deduction runs on a 15-year taper: 100% of export profits for the first 5 years, 50% for the next 5 years, and 50% again for the final 5 years, provided that last tranche is parked in a Special Economic Zone Re-investment Reserve. It is a deduction on export income, so it usually matters most to IT, software and services exporters operating from an SEZ.

One caution before you read further: Section 10AA (SEZ deduction) is a different provision from Section 10(10AA), which exempts leave encashment for salaried employees. This guide covers the SEZ deduction only.

If you run an SEZ services unit, the tax benefit sits alongside a separate obligation to bring your export earnings into India correctly, which is where cross-border payments for service exporters becomes part of the same compliance picture.

Search engines often blur the two because the numbers look alike. Everything below refers to Section 10AA, the SEZ deduction.

The deduction applies to profits from the export of goods or services by the SEZ unit, on this taper:

The reserve in the final block must be used to buy plant and machinery within a set window, or the benefit is clawed back. So the headline "100% tax-free" holds only for the first five years; after that the benefit steps down.

To claim the deduction, the unit must meet these conditions:

• It is a unit set up in a notified SEZ and it exports goods or services.
• It began manufacturing or providing services on or before 31 March 2020 (as of 2026, this sunset date is the key gate).
• It is not formed by splitting up or reconstructing an existing business, and it does not use plant and machinery previously used in India beyond the permitted limit.
• It earns the profit in convertible foreign exchange, brought into India within the period the RBI allows.

Yes, but only for units that already qualified. The SEZ tax holiday was sunset for new units: any SEZ unit that started operations after 31 March 2020 cannot claim Section 10AA. Units that commenced on or before that date continue to enjoy the deduction for the remainder of their 15-year window. The scheme is closed to newcomers, so this is now a benefit that existing SEZ exporters run down, not one a new unit can start (the sunset applies to units commencing after 31 March 2020).

One more interaction to note: a company that has opted into the concessional corporate tax regime under Section 115BAA or 115BAB gives up most incentive deductions, including Section 10AA. Weigh the two before choosing a regime, and confirm with your chartered accountant.

The deduction is not the whole profit unless the unit exports everything it makes. The formula proportions the profit to the export share:

Deduction = Profit of the unit × (Export turnover of the unit ÷ Total turnover of the unit) × applicable percentage

Export turnover here means the consideration received in, or brought into, India in convertible foreign exchange within the RBI-permitted period. Freight, telecom and insurance attributable to delivery outside India are excluded from export turnover, and to keep the ratio fair they are excluded from total turnover too.

Following one unit across the taper shows how the benefit steps down. Take an SEZ software unit that exports everything it makes and earns ₹1 crore of export profit each year, for simplicity.

In years 1 to 5, the unit deducts 100%, so the full ₹1 crore is deductible each year, and it pays tax only on non-export income. Across those five years, that is ₹5 crore of profit shielded.

In years 6 to 10, the rate drops to 50%, so ₹50 lakh is deductible each year and ₹50 lakh becomes taxable. The unit still saves, while it now carries a real tax cost on half its export profit.

In years 11 to 15, the unit can deduct 50% again, but only if it credits that ₹50 lakh to the SEZ Re-investment Reserve and spends it on plant and machinery within the permitted window. If it does not reinvest, that tranche is taxed, so the final block needs planning rather than an automatic claim.

Older export incentives are often confused with Section 10AA, because they served a similar purpose for earlier schemes. A short comparison helps.

The practical takeaway: 10A and 10B belong to the STP and EOU era and no longer offer fresh deductions, while 10AA is the SEZ-era provision that a pre-2020 unit can still run. An IT exporter that once claimed under 10A cannot simply migrate the benefit into 10AA; the unit must independently qualify as an SEZ unit within the sunset date.

The deduction is not automatic on the return. To claim Section 10AA, the unit generally needs:

• A report in Form 56F from a chartered accountant, certifying the deduction computation.
• Proof that export proceeds were realised in convertible foreign exchange within the RBI-permitted period, typically a bank certificate such as the FIRC.
• Working papers showing the export-turnover-to-total-turnover ratio used in the formula.

Because the deduction hinges on foreign-exchange realisation, weak payment documentation is one of the more common reasons a claim is questioned. Keeping the realisation trail clean is not a formality; it is what supports the whole computation when it is reviewed.

The deduction is an income-tax benefit. It does not remove the foreign-exchange and documentation steps that make an export an export. To hold the claim, an SEZ unit still needs its earnings realised in convertible foreign exchange, evidenced by a bank certificate, and reflected in the RBI’s export monitoring systems. In practice that means:

• A Foreign Inward Remittance Certificate or advice from your bank as proof of realisation, which also supports any GST refund. See FIRC for GST refund.
• The correct treatment of your supply as a zero-rated supply under GST, since SEZ supplies are zero-rated separately from the income-tax deduction.
• Software exporters filing the relevant export declarations, covered in STPI software exports and SEZ compliance.

This is where a purpose-built receiving flow helps. Xflow settles export receipts through AD-1 banks with an automatic eFIRA, at the live mid-market rate (MMR) and next business day (T+1), so the money trail behind your Section 10AA claim stays clean. As of February 2026 Xflow holds final Payment Aggregator Cross Border (PA-CB) authorisation from the RBI for both exports and imports. For the wider tax picture of selling services abroad, export of services under GST sits next to the income-tax view here, and services businesses can start from IT-enabled services.

The formula catches out units that bill both SEZ and non-SEZ work. Suppose a unit reports ₹2 crore profit, but only ₹1.2 crore of its ₹2 crore turnover is genuine export turnover realised in foreign exchange. The eligible export profit is ₹2 crore multiplied by 1.2 divided by 2, which is ₹1.2 crore, not the whole ₹2 crore.

Domestic sales, and any receipts not realised in convertible foreign exchange within the permitted window, fall outside the numerator. Units that assume the deduction covers all profit tend to over-claim, which is why the turnover ratio needs careful working papers.

A second point that helps: the deduction is unit-specific, not company-wide. If a company runs one SEZ unit and one ordinary unit, only the SEZ unit’s export profit qualifies, and the two sets of accounts should be kept distinct so the ratio is defensible.

The deduction needs a clear paper trail, so a simple sequence helps.

Step 1: Confirm the unit qualifies

It is an SEZ unit that commenced on or before 31 March 2020, and it is not a reconstruction of an old business. This gate decides everything that follows.

Step 2: Separate export turnover from total turnover

The formula proportions the deduction to the export share, so keep the two streams in distinct ledgers for the unit, making the ratio easy to defend.

Step 3: Compute the eligible profit and apply the year-appropriate rate

Check whether you are in the 100% block, the 50% block, or the reinvestment block before applying the rate.

Step 4: Obtain the Form 56F report

The deduction is not allowed without a report from a chartered accountant, who certifies the computation and the export figures.

Step 5: Keep your foreign-exchange realisation proof

Typically the FIRC, because the deduction rests on proceeds arriving in convertible foreign exchange.

This sequence provides a defensible claim and helps avoid the two errors that surface at assessment: an inflated export ratio and missing realisation proof.

Choosing a tax regime needs a genuine comparison, because you cannot have both. A company that opts into the 22% concessional rate under Section 115BAA gives up Section 10AA, while a company on the normal regime can claim the deduction.

The maths depends on how much of your profit is export profit. When most of it qualifies for the 100% deduction, the normal regime with 10AA usually provides the larger benefit. When the deduction has tapered to 50%, or you are near the end of the 15-year window, the flat concessional rate can offer more.

Because the choice is hard to reverse, it helps to model both before you file, ideally with your chartered accountant.

Section 10AA rewards SEZ units for exporting: a 100% deduction on export profits for five years, then 50% for five, then 50% via a reinvestment reserve for five more. It is available only to units that began operating on or before 31 March 2020, and it does not apply if you have opted into the 115BAA or 115BAB regime. Get the eligibility, the turnover ratio and the reserve condition right, keep your foreign-exchange realisation documented, and the deduction is straightforward to run.

This guide is general information, not tax advice. Confirm your eligibility and computation with a qualified chartered accountant.