Section 218 - Tax on business income of Offshore Banking Units or International Financial Services Centre unit
The 15% bucket is not the entire OBU/IFSC profit. First determine the income that actually falls within section 147(3).
Reviewed by CA Nikhil Gupta · Updated 9 October 2026
Current law and effective date
Section 218 is controlled against the consolidated Income-tax Act, 2025 as amended by the Finance Act, 2026. The Act and Income-tax Rules, 2026 operate from 1 April 2026; earlier tax years and saved proceedings require the repeal-and-savings framework rather than automatic migration.
Primary statute: Income Tax Department consolidated Act | Rules: Notified Income-tax Rules, 2026
2-minute decode
The 15% bucket is not the entire OBU/IFSC profit. First determine the income that actually falls within section 147(3).
Who should use this section
Non-residents, foreign companies, funds, trusts, business trusts, investment vehicles and their advisers when receipts or distributions can fall within the special computation or rate architecture of section 218.
How section 218 works in practice
Section 218 sits in Chapter 13 (Determination of Tax in Special Cases) and should be read as a connected rule rather than an isolated label. The practical question is whether the facts actually satisfy the trigger for “Tax on business income of Offshore Banking Units or International Financial Services Centre unit”. For section 218, begin by characterising the person, instrument and receipt before applying a rate. In a section 218 file, residence, treaty entitlement, beneficial ownership, source, permanent-establishment nexus, foreign-currency acquisition, fund/trust status and distribution reporting can move the same cash receipt into different tax buckets. The section 218 computation should therefore be reconciled to withholding and return reporting rather than prepared in isolation. The operating controls are: Map each income stream to section 147(3); Confirm unit permission, commencement and deduction history; Apply the substituted provision only for the correct tax year. A reviewer should record why map each income stream to section 147(3)., because that conclusion drives the downstream computation, reporting or procedural consequence.
Old-law bridge
Finance Act, 2026 substituted provision
The old-law bridge is a research aid, not an automatic precedent transfer. Match the old provision, the current section, saved proceedings and effective dates before importing an older interpretation.
Finance Act 2026 / current-law note
Finance Act, 2026 substitutes section 218 to tax the post-holiday business-income bucket of an Offshore Banking Unit / IFSC unit. Income falling within section 147(3) is separated from the balance total income and the effective-year rule starts on 1 April 2026.
Professional alert
Map each income stream to section 147(3). Confirm unit permission, commencement and deduction history. Apply the substituted provision only for the correct tax year.
Connected Income-tax Rules, 2026 and Forms
| Rule | Current control | Form |
|---|---|---|
| No provision-specific Rule/Form is directly mapped in this tranche. Apply the section itself and test any separate Rule only where another provision expressly cross-refers to it. | ||
Worked application
An IFSC unit has ₹10 crore qualifying section 147(3) income and ₹2 crore other income. The first bucket is taxed at 15%; the balance follows applicable rates.
Evidence / compliance checklist
- Map each income stream to section 147(3).
- Confirm unit permission, commencement and deduction history.
- Apply the substituted provision only for the correct tax year.
- Preserve residence/treaty and beneficial-ownership evidence relevant to section 218.
- Reconcile gross receipts, withholding certificates and return disclosure for section 218.
- Keep instrument, acquisition-currency and distribution records where section 218 depends on them.
Common mistake
Applying the domestic special rate in section 218 without first testing character, source and treaty interaction. For section 218, the 1961 Act bridge helps research, but the current 2025 Act wording and section 159 treaty comparison control the final position.
Recommended approach
For section 218, create a one-page legal-to-evidence matrix. For section 218, put the current statutory condition in the first column, the transaction or procedural fact in the second, the supporting document in the third, and the tax/procedural consequence in the fourth. The first checkpoint should be: Map each income stream to section 147(3). This section 218 matrix makes reviewable differences visible before a return, opinion, notice response or litigation position is finalised.
Thresholds, rates, periods and timing checkpoints
- 15% section 147(3) income bucket
Related provisions and interaction map
Section 218 interacts with residence/source rules, section 159 treaty relief, withholding, return obligations and the legal character of the receipt or distribution. Where section 218 uses a trust/fund statement, the payor and recipient records should reconcile to the same tax bucket.
Direct navigation / cross-checks: section 217, section 147, section 219
Validated statutory core - official current source controlled
Text-status note: This page presents a validated operative statutory core rather than pretending a summary is verbatim law. Use the linked official consolidated Act before quoting sub-section language in a filing, opinion or litigation document.
Primary-source trail
Statute: Income-tax Act, 2025 as amended by Finance Act, 2026
Rules: Income-tax Rules, 2026
Law navigation: Income Tax Department 2025 Act / Rules hub
Finance Act 2026 amendment materials: Official Notes on Clauses
Quoting note: The official consolidated Act controls verbatim legislative language.
FAQs
Does an old Income-tax Act, 1961 decision automatically decide section 218?
No. The old-law bridge helps research, but transferability depends on materially matching language, transition rules and any Finance Act 2026 change.
Which source should be quoted in advice or litigation?
Quote the official consolidated statute for the relevant tax year. Where this page presents a validated statutory core rather than complete verbatim text, use the official Act for sub-section wording.
What should be checked immediately before acting?
Re-check the current statutory text, the section-specific Rule/Form mapping and any notification or court order relevant to the exact facts. Section 218 should not be applied from a historic section number or a generic tax summary alone.