Section 10AA of Income Tax Act: SEZ Export Deduction and Eligibility
Section 10AA of the Income-tax Act, 1961 provided a profit-linked deduction for eligible export-oriented units established in Special Economic Zones (SEZs). The benefit is time-limited, subject to a commencement cutoff, export-profit calculation, filing obligations and restrictions on the formation of the unit.
What is the deduction under Section 10AA?
It is a deduction from taxable total income for profits derived from export of articles, goods or eligible services by a qualifying SEZ unit. It is not an automatic exemption for every SEZ enterprise and does not cover all domestic turnover.
| Consecutive years from commencement | Maximum deduction | Conditions |
|---|---|---|
| Years 1 to 5 | 100% of eligible export profits | Qualifying SEZ unit and compliant return |
| Years 6 to 10 | 50% of eligible export profits | Continued eligibility |
| Years 11 to 15 | Up to 50% of eligible export profits | Qualifying amount transferred to and used from SEZ Re-investment Reserve Account |
The deduction cannot exceed total income computed before the deduction. The relevant 15-year period starts when the qualifying unit begins eligible operations, not when the deduction is first claimed.
Who qualifies?
Under Section 10AA(1) and (4), the claimant must be an entrepreneur within Section 2(j) of the Special Economic Zones Act, 2005, operating an eligible unit in an SEZ. The unit must have commenced manufacturing, production or qualifying services in a previous year relevant to an assessment year beginning on or after 1 April 2006 but before 1 April 2021. This generally means commencement before 1 April 2020.
The unit must not have been formed by splitting up or reconstructing an existing business, subject to the statutory revival exception; nor may it be formed by transferring previously used plant or machinery beyond the permitted statutory limits. Mere SEZ approval is insufficient without meeting income-tax conditions.
How are export profits calculated?
Section 10AA(7) attributes qualifying profits to export turnover using the proportion of export turnover to total turnover of the eligible unit:
Under Explanation 1, export turnover broadly refers to consideration for exports received in or brought into India, excluding specified freight, telecommunications, insurance and foreign-exchange expenses for services rendered outside India. Export under the SEZ Act involves goods or services taken or provided out of India, including permitted non-physical exports. On-site software development abroad may qualify under Explanation 2.
Re-investment reserve: years 11 to 15
Section 10AA(1)(ii), (2) and (3) permits the final five-year deduction only to the extent of the prescribed amount, capped at 50% of eligible profits, debited to the profit and loss account and credited to the SEZ Re-investment Reserve Account. The reserve must be applied toward acquisition of eligible plant or machinery first put to use within three years following the year of reserve creation. Pending acquisition, it may be used for the undertaking's business but not for dividends, profit remittances or creating assets outside India. Misuse or failure to deploy the reserve results in the statutory amount being brought to tax in the relevant year.
Filing, audit and other statutory conditions
A timely income-tax return is necessary under the proviso to Section 10AA(1), referring to Section 139(1) of the 1961 Act. The prescribed accountant's report for Section 10AA is Form 56F; the applicable filing rules and deadlines must also be followed. For the 2025 Act regime, the Income Tax Department identifies Form 33 in connection with Section 144 reinvestment-reserve reporting.
Section 10AA(5) addresses qualifying amalgamations and demergers; subsection (6) addresses carry-forward and set-off of specified losses; subsection (8) imports applicable conditions from Section 10A; subsection (9) applies relevant anti-abuse provisions of Section 80-IA; and subsection (10) prevents duplicate claims with Section 35AD for the same specified business.
Existing free-trade-zone or export-processing-zone units converted into SEZ units have special rules governing the starting point of the deduction period. Units that have exhausted the earlier Section 10A benefit cannot simply restart the incentive period under Section 10AA.
Key definitions
Entrepreneur and Unit
Section 2(j) of the SEZ Act defines an entrepreneur by reference to a person granted a letter of approval by the Development Commissioner; Section 2(zc) defines a Unit, subject to that Act's wording.
Manufacture and Special Economic Zone
Section 2(r) of the SEZ Act defines manufacture, while Section 2(za) defines a Special Economic Zone. These statutory meanings apply to Section 10AA through Explanation 1.
Export turnover
Export turnover is defined specifically by Explanation 1(i) to Section 10AA, and should not be confused with total invoiced sales or total turnover.
Important practical considerations
Check the date of commencement, SEZ letter of approval, export receipts, unit-wise books, reserve utilisation, filing dates and audit report before calculating any claim. Where the taxpayer has opted for a concessional tax regime that disallows Section 10AA, the deduction is unavailable under that regime. The rules for companies under Section 115BAA and for other eligible taxpayers under Section 115BAC should be considered separately.
Official statutory references
- Income Tax Department: Section 10AA, Income-tax Act, 1961
- Income Tax Department: Income-tax Act, 2025 and related resources
- Income Tax Department: Form 56F guidance
- Income Tax Department: Form 33 guidance under Section 144
- Government of India: Special Economic Zones
Frequently asked questions
Can a new SEZ unit starting in 2026 claim Section 10AA?
No fresh Section 10AA deduction is available to a unit beginning eligible operations in 2026 because the statutory commencement cutoff has passed. Older eligible units may continue through their remaining deduction period, subject to conditions.
Is the SEZ deduction available for 15 years?
Potentially, yes: five years at 100%, five years at 50%, and a further five years subject to the special reinvestment reserve conditions.
Is an SEZ unit automatically exempt from income tax?
No. Eligibility, the export-profit formula, income cap, filing requirements and the applicable tax regime must all be examined.
Read the original Section 10AA article and historical legislative notes
Archival source text: The following text is retained from the earlier webpage for completeness. It is historical and does not incorporate all subsequent amendments; use the current official statute above for operative wording.
1(1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of 2 April, 2006, a deduction of
(i) hundred per cent. of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent. of such profits and gains for further five assessment years and thereafter;
(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent. of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Special Economic Zone Re-investment Reserve Account) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).
3 Explanation. For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.
(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely:
(a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised
(i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;
(b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use.
(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),
(a) has been utilised for any purpose other than those referred to in sub-section (2), the amount so utilised; or
(b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount not so utilised, shall be deemed to be the profits,
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (2), and shall be charged to tax accordingly:
Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1).
Explanation. For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section:
Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone:
Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006.
4 (4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:-
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.
Explanation.-The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that subsection.
(5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,-
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place.
(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off.
(7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on 5 by the undertaking:
6 Provided that the provisions of this sub-section as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009) shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.
(8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if-
(a) for the figures, letters and word "1st April, 2001", the figures, letters and word "1st April, 2006" had been substituted;
(b) for the word "undertaking", the words "undertaking, being the Unit" had been substituted.
(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
7 (10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified business, referred to in clause (c) of sub-section (8) of section 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.
Explanation 1.-For the purposes of this section,-
(i) "export turnover" means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;
(ii) "export in relation to the Special Economic Zones" means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise;
(iii) "manufacture" shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005;
(iv) "relevant assessment year" means any assessment year falling within a period of fifteen consecutive assessment years referred to in this section;
(v) "Special Economic Zone" and "Unit" shall have the same meanings as assigned to them under clauses (za) and (zc) of section 2 of the Special Economic Zones Act, 2005. Explanation 2.-For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.
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1. Ins. by Act 28 of 2005, s. 27 and the Second Schedule (w.e.f. 10-2-2006).
2. Subs. by Act 28 of 2016, s. 8, for the words, figures and letters April, 2006, a deduction of (w.e.f. 1-4-2017).
3. Ins. Act 7 of 2017, s. 7 (w.e.f. 1-4-2018).
4. Subs. by Act 22 of 2007, s. 7, for certain words (w.e.f. 10-2-2006).
5. Subs. by Act 33 of 2009, s. 6, for "by the assessee" (w.e.f. 1-4-2010).
6. Ins. by Act 14 of 2010, s. 6 (w.e.f. 1-4-2010).
7. Ins. by Act 25 of 2014, s. 6, (w.e.f. 1-4-2015).
Editorial note: This article is general legal information. Tax treatment depends on the applicable tax year, statutory amendments, notifications and individual facts.