TDS Exemption on Dividends Between IFSC Aircraft-Leasing Units – What Investors Need to Know

The Central Board of Direct Taxes (CBDT) has issued Notification No. 141/2026, granting exemption from tax deducted at source (TDS) on dividend payments made between International Financial Services Centre (IFSC) aircraft-leasing units under the Income-Tax Act, 2025. The relief starts on 1 April 2026 and changes the way investors and small business owners report such dividends in their tax returns.

What the notification changes

Earlier, any dividend paid by an IFSC aircraft-leasing company to another IFSC aircraft-leasing company was subject to TDS at the rate prescribed for dividend income under the Income-Tax Act, 2025. The new CBDT notification removes the requirement to deduct TDS on such inter-company dividend transfers, provided the recipient is also an IFSC aircraft-leasing unit.

The exemption is codified in Section 194-OA of the Income-Tax Act, 2025, which now includes a specific carve-out for "dividend paid by an IFSC aircraft-leasing unit to another IFSC aircraft-leasing unit". The exemption does not apply to dividends paid to individual shareholders, domestic companies, or foreign entities that are not registered as IFSC aircraft-leasing units.

Who benefits from the exemption

The relief is aimed at two main groups:

Investors holding shares of IFSC aircraft-leasing companies – including Indian residents and non-resident Indians who have acquired shares through the IFSC platform.
Small business owners that own subsidiary IFSC aircraft-leasing units and receive dividend income from a parent or sister unit within the IFSC.

Only entities that are formally registered as "aircraft-leasing units" in the IFSC and have obtained a PAN under the IFSC jurisdiction qualify. The exemption does not extend to dividend income earned from non-IFSC listed companies or from domestic listed shares.

Practical impact – a worked example

Consider two IFSC aircraft-leasing units, Alpha Leasing Ltd. (the payer) and Beta Leasing Ltd. (the recipient). Alpha declares a dividend of ₹10 million to Beta for the financial year ending 31 March 2026.

Before the notification, Alpha would have been required to deduct TDS at the applicable dividend rate (for example, 10 %). Beta would receive ₹9 million, and Alpha would remit ₹1 million to the government as TDS. Beta could later claim the ₹1 million as a tax credit while filing its return.

After the notification, no TDS is deducted. Beta receives the full ₹10 million, and there is no TDS credit to claim. The cash flow benefit is ₹1 million for Beta, and administrative compliance is reduced for both parties.

How to claim the benefit in your tax return

Even though TDS is not deducted, the dividend must still be reported in the income tax return (ITR) for the relevant assessment year. The steps are:

Obtain Form No. 1(N) issued by the CBDT, which serves as a declaration that the dividend qualifies for the exemption.
Attach a copy of the Form No. 1(N) to the dividend schedule in ITR-3 or ITR-4, as applicable.
Enter the gross dividend amount in the "Dividend Income" section and mark it as "Exempt from TDS under Notification No. 141/2026".
Retain the dividend voucher and the Form No. 1(N) for at least six years, as the Assessing Officer may request them during verification.

For small business owners filing under the presumptive taxation scheme, the dividend can be shown in the "Income from Other Sources" schedule, with a note indicating the exemption.

Key dates and compliance timeline

The exemption is effective from 1 April 2026, which is the start of the tax year 2026-27 under the Income-Tax Act, 2025. Companies must start using Form No. 1(N) for dividend payments made on or after this date. Returns for the financial year 2025-26 (assessment year 2026-27) must reflect the exemption where applicable.

Companies that continue to deduct TDS after 1 April 2026 on qualifying dividends may face a penalty under Section 271 C of the Income-Tax Act, 2025. Therefore, it is essential to update dividend processing systems before the start of the new tax year.

Common mistakes to avoid

1. Assuming the exemption applies to all dividend recipients. The relief is limited to IFSC aircraft-leasing units. Dividends paid to individual shareholders or domestic companies remain subject to TDS.

2. Forgetting to obtain Form No. 1(N). Without the form, the dividend may be treated as taxable with TDS, leading to double taxation.

3. Not updating the dividend voucher template. The voucher must clearly state that the dividend is exempt under Notification No. 141/2026. Failure to do so can trigger queries from the tax department.

4. Mis-classifying the dividend in the ITR. The dividend must be entered in the appropriate schedule and flagged as exempt; otherwise, the software may automatically calculate TDS credit that does not exist.

5. Ignoring the impact on foreign tax credit. For non-resident investors, the exemption means there is no Indian TDS to credit against tax payable in their home country. They should coordinate with their home-country tax advisors.

Frequently asked questions

Is the exemption applicable to dividends received from non-IFSC aircraft-leasing companies?

No. The exemption is strictly limited to dividends paid between entities that are both registered as aircraft-leasing units in the IFSC. Dividends from domestic or other foreign entities remain subject to the normal TDS provisions.

Do I still need to disclose the dividend in my tax return?

Yes. Even though TDS is not deducted, the dividend is taxable income and must be reported. You should indicate that it is exempt from TDS under Notification No. 141/2026 and attach Form No. 1(N) as supporting documentation.

What if the payer mistakenly deducts TDS after 1 April 2026?

The payer should file a revised TDS return to correct the error and refund the amount to the recipient. The recipient can claim a refund of the excess TDS while filing the return for the same assessment year.

Can an individual investor claim the exemption if they hold shares of an IFSC aircraft-leasing unit?

No. The exemption is only for dividend payments made between IFSC aircraft-leasing units. An individual shareholder receiving dividend from an IFSC aircraft-leasing company will still be subject to TDS as per the regular dividend provisions.

Sources

Reviewed: November 2026. Tax rules change — verify the current financial year and assessment year before you rely on any figure.

This is general educational information for Indian taxpayers, not personalised tax, legal or financial advice. Union of Taxpayers is an independent platform and not a government body. Consider a qualified professional for your specific situation.

Not professional advice

This article is general information only — not personalised tax, legal or financial advice. Tax rules change; verify figures on official sources and consider a qualified professional before acting. Union of Taxpayers is an independent platform and not a government body.

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