Tax

Can an SEZ unit still claim the section 10AA deduction under the Income-tax Act, 2025?

Author:: Editorial team, serviceexportguide.com
Verified by:: Editorial team
Published: 28 October 2026
Last modified: 30 October 2026
Reading time: 6 min read

Short answer

Section 144 of the Income-tax Act, 2025 allows the SEZ deduction only where the unit would have been eligible under section 10AA of the 1961 Act.¹ The amount is calculated as per section 10AA, only for the years it would have allowed.¹ Section 10AA gave 100% of export profits for five years, then 50% for five.²

Applies to	Governed by	Deadline	Penalty	Last verified
SEZ entrepreneurs already within the section 10AA window	Income-tax Act, 2025, section 144¹	Only the tax years section 10AA would have allowed¹	Not applicable	28 October 2026
Deduction blocks	Income-tax Act, 1961, section 10AA²	Up to fifteen consecutive years from the year operations began²	Not applicable	28 October 2026
SEZ Re-investment Reserve (block 3)	Section 10AA²	Machinery or plant first put to use within three years²	Not applicable	28 October 2026

Section 10AA of the Income-tax Act, 1961 gave a profit-linked deduction to units in Special Economic Zones (SEZs) that export goods or services. Many IT, IT-enabled services and design businesses set up SEZ units to use it. From 1 April 2026 the 1961 Act is replaced by the Income-tax Act, 2025, and section 10AA no longer exists as such.³ The new Act keeps the benefit for existing units through section 144.¹

SEZ tax positions depend on the unit's start date, approvals and accounts, so treat this page as orientation and confirm with a chartered accountant (CA).¹²

What is the section 10AA deduction for SEZ units?

The section 10AA deduction for SEZ units is a profit-linked deduction on export profits of an SEZ unit, granted under section 10AA of the Income-tax Act, 1961 and carried forward for existing units by section 144 of the Income-tax Act, 2025.¹² Section 10AA allowed an entrepreneur (as defined in section 2(j) of the Special Economic Zones Act, 2005) to deduct export profits of an SEZ unit that began to manufacture or produce articles or things or provide services during a previous year relevant to an assessment year commencing on or after 1 April 2006.²

The deduction ran in three blocks.²

Block	Years	Deduction	Best for
1	First five consecutive assessment years from the year the unit begins operations	100% of profits and gains derived from export of articles, things or services	Units in their first five years
2	Next five assessment years	50% of such profits	Units in years six to ten
3	Next five assessment years	Up to 50% of the profit, to the extent debited to profit and loss and credited to a "Special Economic Zone Re-investment Reserve Account"	Units reinvesting in machinery or plant

The reserve in block 3 had to be used to acquire machinery or plant first put to use within three years, and could not be distributed as dividends or remitted abroad in the meantime.²

Who can still claim the section 10AA deduction in tax year 2026-27?

An SEZ unit can still claim the section 10AA deduction in tax year 2026-27 only if it is still within its fifteen-year section 10AA window and meets the section 10AA conditions.¹²

Entity	Applicable	Why	Best for
SEZ unit within its fifteen-year window	Yes, for remaining years	Section 144 allows the years section 10AA would have allowed¹	IT and IT-enabled services units in block 2 or 3
SEZ unit past its fifteen-year window	No	No years remain under section 10AA¹²	Not applicable
Freelancer or firm outside an SEZ	No	Section 10AA covers only an entrepreneur under the SEZ Act²	See GST on supplies to SEZ units instead

For example, a software services unit that began operations some years ago and is now in its second or third block can continue to claim for the remaining years, using section 144 in place of section 10AA.¹ If you are not in an SEZ, the closest topics are GST on supplies to SEZ units and STPI registration.

Note: The CBDT's online copy of section 10AA that we checked shows the start condition as an assessment year "commencing on or after the 1st day of April, 2006" and does not show a closing date for new units.² Whether a later closing date for new units applies could not be verified against the Act text for this page, so confirm your unit's eligibility with your CA.

How does section 144 of the Income-tax Act, 2025 carry the deduction forward?

Section 144 of the 2025 Act, titled "Special provisions in respect of newly established Units in Special Economic Zones", carries the deduction forward by allowing it in any tax year where both conditions below hold.¹

Entrepreneur condition: the assessee is an entrepreneur under section 2(j) of the SEZ Act who begins to manufacture or produce articles or things or provide services as referred to in section 10AA of the 1961 Act.¹
Eligibility condition: the assessee is eligible to claim the deduction for that tax year under section 10AA, as if the 1961 Act had not been repealed.¹

The deduction is then subject to two conditions: the amount is calculated as per section 10AA, and it is allowed only for such tax years as section 10AA would have allowed.¹ In plain terms, section 144 creates no new incentive: it lets a unit already inside the section 10AA window finish its remaining years under the new Act, using the old computation.¹

What records support a section 10AA claim?

The records that support a section 10AA claim are the unit's start year, the years already claimed, evidence of export turnover received in India, and the use of any reserve.¹²

Record	Why it matters	Best for
Year operations began	Every block is counted from it²	All SEZ units
Years claimed so far	Section 144 allows only the remaining years¹	Units in block 2 or 3
Bank credit advices	Show consideration received in or brought into India²	Proving export turnover
SEZ Re-investment Reserve ledger	Shows the reserve was used for machinery or plant²	Units in block 3

SEZ approvals, reporting and the foreign exchange rules for SEZ units sit outside the Income-tax Act; see SEZ export payment rules.

How is the section 10AA deduction calculated?

The section 10AA deduction is calculated on export profits, which are the unit's business profits multiplied by export turnover over total turnover.² Section 10AA says the profits derived from export are the amount that bears to the profits of the unit's business the same proportion as export turnover bears to total turnover.²

Export turnover: the consideration for exports by the unit received in, or brought into, India by the assessee.²
Exclusions: freight, telecommunication charges or insurance attributable to delivering goods outside India, and expenses incurred in foreign exchange in rendering services (including computer software) outside India.²
Export by any mode: export includes providing services out of India from an SEZ by any mode, physical or otherwise.²
On-site software: profits from on-site development of computer software outside India are treated as profits from export of computer software.²

For example, say an SEZ unit in block 2 has business profits of ₹1 crore, export turnover of ₹8 crore and total turnover of ₹10 crore. Export profits are ₹1 crore × 8 ÷ 10 = ₹80 lakh, and the block 2 deduction is 50% of that, or ₹40 lakh, under the section 10AA formula.²

What happens if an SEZ unit claims the section 10AA deduction wrongly?

If an SEZ unit claims the section 10AA deduction for a year outside its window, the claim falls outside section 144, which allows the deduction only for the tax years section 10AA would have allowed.¹ Block 3 also carries a use condition: the reserve had to be used for machinery or plant first put to use within three years, and could not be distributed as dividends or remitted abroad in the meantime.²

Counting years wrongly: every block runs from the year operations began.²
Counting unpaid export sales: only consideration received in or brought into India counts as export turnover.²

What are the common mistakes with the section 10AA deduction?

The common mistakes with the section 10AA deduction are treating section 144 as a new incentive, using the wrong turnover figure, and assuming non-SEZ businesses qualify.¹²

New-incentive assumption: section 144 lets existing units finish their remaining years only.¹
Wrong turnover figure: export turnover excludes certain freight, telecommunication, insurance and foreign exchange expenses.²
Non-SEZ businesses: a freelancer or firm outside an SEZ is not an entrepreneur under the SEZ Act.²
Missing reserve records: block 3 needs evidence of how the reserve was used.²

Confirm your unit's start date, block and figures with your CA before filing the return.

How did we verify this?

We checked this page against the sources below on 30 October 2026. Read our methodology or report an error.

Frequently asked questions

Can a new SEZ unit set up in 2026 claim section 10AA?+

A new SEZ unit set up in 2026 can claim only if section 144 of the Income-tax Act, 2025 applies, which needs the unit to have been eligible under section 10AA had the 1961 Act not been repealed, and only for the years section 10AA would have allowed.¹ Check the start-date condition with your CA and the SEZ authority.

What is the section number for the SEZ deduction in the new Act?+

The SEZ deduction sits in section 144 of the Income-tax Act, 2025, titled 'Special provisions in respect of newly established Units in Special Economic Zones'.¹ Section 144 replaces section 10AA of the Income-tax Act, 1961 for tax year 2026-27 onwards, and the amount is still calculated as per section 10AA.¹

How long does the section 10AA deduction last?+

The section 10AA deduction lasts up to fifteen consecutive years: 100% of export profits for five years, 50% for the next five, and up to 50% of profits transferred to the SEZ Re-investment Reserve Account for the next five.² Section 144 of the 2025 Act allows only the years still remaining.¹

Does export turnover under section 10AA include money still unpaid?+

Export turnover under section 10AA means the consideration for exports received in, or brought into, India by the assessee, so unpaid amounts are outside it until received.² It excludes certain freight, telecommunication, insurance and foreign exchange expenses attributable to delivering goods or rendering services outside India.²

Does section 10AA apply to freelancers?+

Section 10AA applies only to an entrepreneur with a unit in a Special Economic Zone, as defined in the Special Economic Zones Act, 2005.² A freelancer working from home or from an ordinary office outside an SEZ is not covered, and section 144 of the 2025 Act carries forward the same condition.¹

When did the Income-tax Act, 2025 replace the 1961 Act?+

The Income-tax Act, 2025 came into force from 1 April 2026 and replaced the Income-tax Act, 1961, according to the Press Information Bureau.³ Section 10AA no longer exists as such, and an SEZ unit still inside its deduction window claims the remaining years under section 144 of the 2025 Act.¹

Does on-site software development abroad count for section 10AA?+

On-site software development abroad counts for section 10AA, because the section treats profits from on-site development of computer software outside India as profits from export of computer software.² Export also includes providing services out of India from an SEZ by any mode, physical or otherwise, under the same section.²

This page is general information for Indian service exporters, not tax or legal advice. Rules change and outcomes depend on your facts, so confirm with a chartered accountant before acting.

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