Tax Incentives for Foreign Companies in India: SEZ, PLI & Startup Benefits

Why Tax Incentives Matter More Than the Headline Rate

Foreign companies entering India face a base corporate tax rate of 35%, with surcharge and cess pushing the effective rate to 37.13%–38.22% depending on income levels. That is among the highest in Asia, and it understandably gives pause to CFOs evaluating an India entry. But the headline rate is misleading without context.

India has built a multi-layered incentive architecture — spanning Special Economic Zones, Production Linked Incentive schemes, startup exemptions, concessional manufacturing rates, and state-level subsidies — that can reduce the effective tax burden by 50% or more for qualifying operations. The challenge is that these incentives are scattered across different statutes, administered by different ministries, and subject to different eligibility windows.

This article is part of our Complete Tax Guide for Foreign Companies in India. Here we dive deep into every major tax incentive available to foreign companies in FY 2026-27, with specific rates, eligibility criteria, application processes, and practical considerations that determine whether a particular incentive is worth structuring around.

Special Economic Zone (SEZ) Benefits Under Section 10AA

How the SEZ Tax Holiday Works

Special Economic Zones remain one of India's most powerful incentive tools for export-oriented foreign companies. Units set up in notified SEZs receive a graduated tax holiday on export profits under Section 10AA of the Income Tax Act:

• Years 1–5: 100% deduction of export profits from taxable income
• Years 6–10: 50% deduction of export profits
• Years 11–15: 50% deduction, but only to the extent profits are transferred to a Special Economic Zone Re-Investment Reserve Account and utilized for business purposes within three years

The practical impact is significant. A foreign company operating a software development centre in an SEZ with annual export profits of INR 10 crore would pay zero corporate tax for five years — saving approximately INR 4.37 crore annually at the 38.22% effective rate for foreign companies. Over the full 15-year window, the cumulative saving on INR 10 crore annual profits exceeds INR 43 crore.

Eligibility and Sunset Provisions

The Section 10AA deduction is available to units that commenced operations between 1 April 2006 and 30 June 2020. This means no new units can claim the deduction — but existing units that started operations before the deadline continue to receive the full 15-year benefit. If your company established an SEZ unit in 2019, you are entitled to benefits through 2034.

For new investments, India has been developing the Development of Enterprise and Service Hubs (DESH) framework to replace the SEZ Act 2005. Although the DESH Bill has not been enacted as of early 2026, the existing SEZ regime continues to operate for units already approved.

Other SEZ Benefits Beyond Income Tax

SEZ units receive additional benefits that reduce operating costs:

• Customs duty exemption: Zero customs duty on imported capital goods, raw materials, consumables, and spare parts used within the SEZ
• GST zero-rating: Supplies to SEZ units are treated as zero-rated under GST, meaning the supplier can claim input tax credit while the SEZ unit pays no GST
• Single window clearance: Central and state-level approvals processed through a single portal
• Exemption from industrial licensing: Manufacturing activities in SEZs do not require separate industrial licenses
• No minimum export obligation: Unlike Export Oriented Units (EOUs), SEZ units have more flexible export obligations depending on the zone type

Production Linked Incentive (PLI) Schemes

How PLI Works for Foreign Companies

The Production Linked Incentive scheme is India's flagship manufacturing incentive, covering 14 strategic sectors with a total government outlay of INR 1.97 lakh crore (approximately USD 23.5 billion). Unlike tax deductions that reduce taxable income, PLI provides direct cash incentives calculated as a percentage of incremental sales over a base year.

Foreign companies are explicitly eligible. Samsung, Foxconn, Pegatron, and Flextronics are among the global manufacturers that have received PLI approvals for electronics manufacturing in India. As of December 2025, 836 applications have been approved across all 14 sectors, with cumulative realized investments exceeding INR 2.16 lakh crore and cumulative sales crossing INR 20.41 lakh crore.

The 14 PLI Sectors and Incentive Rates

Each sector has its own PLI scheme with specific incentive rates, eligibility thresholds, and tenure:

PLI Application Process

Each PLI sector has a designated implementing ministry. The general application process involves:

1. Application: Submit through the sector-specific portal with details on investment plan, manufacturing capacity, and projected incremental sales
2. Evaluation: The implementing ministry evaluates applications against sector-specific eligibility criteria
3. Approval and agreement: Approved applicants sign an agreement with the government committing to minimum investment and incremental sales thresholds
4. Performance verification: Annual verification of incremental sales and investment targets
5. Incentive disbursement: Direct payout, typically within 60–90 days of verified claim submission

Startup Benefits Under Section 80-IAC

100% Profit Exemption for Three Years

Foreign-funded startups incorporated in India can claim a 100% income tax deduction on profits for any three consecutive assessment years within a ten-year window from the date of incorporation, under Section 80-IAC of the Income Tax Act.

The Union Budget 2025-26 extended the eligibility window: startups incorporated before 1 April 2030 now qualify, up from the earlier cutoff of 1 April 2025. As of mid-2025, the Department for Promotion of Industry and Internal Trade (DPIIT) had approved over 3,700 startups for this exemption.

Eligibility Criteria

To qualify, a company must meet all of the following conditions:

• Entity type: Incorporated as a private limited company or a limited liability partnership (LLP)
• Incorporation date: After 1 April 2016 and before 1 April 2030
• Turnover limit: Annual turnover must not exceed INR 100 crore in the assessment year for which deduction is claimed
• Capital limit: Total paid-up share capital and share premium must not exceed INR 25 crore
• Innovation requirement: The business must be working towards innovation, development, or improvement of products, processes, or services, or must be a scalable business model with high potential for employment generation or wealth creation
• DPIIT recognition: Must be recognized as a startup by DPIIT
• Inter-Ministerial Board certification: Must obtain certification from the IMB confirming eligibility for tax benefits

Foreign Funding Does Not Disqualify

A common misconception is that foreign-funded companies cannot claim startup benefits. Section 80-IAC applies to both Indian-funded and foreign-funded startups. A wholly owned subsidiary of a foreign parent can qualify, provided it meets the turnover and capital limits and obtains DPIIT recognition and IMB certification independently.

However, there is an important structural consideration: the INR 25 crore capital limit (paid-up capital plus share premium) can be quickly breached if the foreign parent invests significant equity at a premium valuation. This needs to be planned carefully during the initial investment structuring.

Concessional Corporate Tax Rate for New Manufacturing

Section 115BAB: 15% Effective Rate (Window Now Closed for New Companies)

Domestic companies engaged exclusively in manufacturing that were incorporated after 1 October 2019 and commenced production before 31 March 2024 could opt for a concessional corporate tax rate of 15% under Section 115BAB, bringing the effective rate to 17.16% with surcharge and cess. This is significantly lower than the standard 22% rate (25.17% effective) available under Section 115BAA. The 31 March 2024 sunset date was not extended, so new companies that commenced manufacturing after 31 March 2024 cannot opt for the 15% rate — they fall under the standard Section 115BAA regime (22% base, 25.17% effective). Companies that already elected Section 115BAB before the sunset continue to enjoy the concessional rate.

There is a critical distinction here: this concessional rate is available only to domestic companies — companies incorporated under the Companies Act 2013 in India. A foreign company operating through a branch office or paying tax as a foreign company cannot access this rate. But a foreign-owned subsidiary incorporated in India as a domestic company that elected Section 115BAB before the sunset continues to enjoy the 15% rate.

Strategic Implication

This creates a powerful incentive to structure India operations through an Indian subsidiary rather than a branch. The tax rate difference is stark:

The difference between 38.22% and 17.16% is massive — on INR 100 crore of profit, it amounts to INR 26.52 crore in annual tax savings. This is why most foreign companies entering India's manufacturing sector structure their operations through a wholly owned subsidiary rather than a branch office.

IFSC (International Financial Services Centre) Benefits

GIFT City IFSC Tax Regime

Units in India's International Financial Services Centre at GIFT City, Gujarat, receive a separate set of incentives designed to compete with Singapore, Dubai, and Hong Kong:

• 100% tax holiday: Exemption on specified income for 10 consecutive years within a 15-year window from the date of permission
• MAT: Minimum Alternate Tax at 9% of book profits (compared to 15% for other companies)
• Capital gains exemption: No capital gains tax on transfer of specified securities by non-residents
• Dividend taxation: Dividend paid by IFSC units to non-residents taxed at only 10%
• No withholding on specified payments: Interest and dividends paid by IFSC units are exempt from withholding in certain cases

For foreign financial services companies — banks, fund managers, fintech firms, insurance companies — GIFT City IFSC offers an effective tax rate that approaches zero for the first 10 years of operation.

State-Level Incentives

How State Incentives Stack with Central Benefits

Beyond central government incentives, individual Indian states compete aggressively for foreign investment with their own subsidy and incentive packages. These typically include:

• Capital investment subsidies: 15–30% of fixed capital investment, depending on the state and sector
• Stamp duty exemption: Full or partial exemption on land and property registration
• Electricity tariff subsidies: Concessional power rates for 5–7 years, especially for manufacturing units
• SGST reimbursement: Some states reimburse the state component of GST for a fixed period
• Land at subsidized rates: Industrial plots in state industrial development corporation parks at below-market rates
• Employment incentives: Reimbursement of EPF contributions for local hiring

States like Tamil Nadu, Karnataka, Maharashtra, Gujarat, and Telangana have the most competitive packages for foreign companies. The specific incentives depend on the investment size, sector, and location within the state (districts classified as backward or aspirational typically receive higher incentives).

Research and Development Deductions

Section 35 and Patent Box Regime

Companies investing in R&D in India can claim deductions under Section 35 of the Income Tax Act:

• In-house R&D: 100% deduction on revenue expenditure and capital expenditure incurred on approved in-house R&D facilities. The weighted deduction of 200% was discontinued from AY 2021-22, but the 100% deduction continues.
• Payments to approved research institutions: 100% deduction on sums paid to universities, national laboratories, or specified institutions for scientific research
• Patent Box regime: A concessional tax rate of 10% applies to royalty income earned from patents developed and registered in India. This incentivizes foreign companies to locate their R&D and patent creation activities in India.

Practical Framework: Choosing the Right Incentive

Decision Matrix by Business Type

Not every incentive is relevant to every foreign company. Here is a practical framework based on the type of India operation:

Stacking Multiple Incentives

Indian law does not prohibit combining certain incentives. A foreign company could potentially:

• Set up a manufacturing subsidiary to access the 15% concessional rate under Section 115BAB
• Apply for PLI in an eligible sector for additional 4–13% cash incentive on incremental sales
• Claim state-level capital subsidies and stamp duty exemptions
• Claim R&D deductions under Section 35 for any research activities

However, there are anti-double-benefit rules. For instance, a company that opts for Section 115BAB or Section 115BAA cannot claim certain deductions including Section 10AA (SEZ) benefits and Section 80-IAC (startup) benefits simultaneously. Structuring requires careful evaluation of which combination maximizes post-tax returns over the full investment horizon.

For assistance structuring your India investment to maximize available incentives, consult our tax advisory services team or FDI advisory team.

Key Takeaways

• SEZ benefits continue for existing units: Section 10AA provides up to 15 years of graduated tax exemption on export profits, but only for units that commenced before June 2020
• PLI offers direct cash incentives: Foreign companies are eligible across all 14 sectors, with incentive rates of 4–20% of incremental sales and a total government outlay of INR 1.97 lakh crore
• Startup exemption extended to 2030: Section 80-IAC now covers startups incorporated before 1 April 2030, offering 100% profit exemption for three consecutive years
• The 15% manufacturing rate window is closed for new companies: Section 115BAB required production to commence before 31 March 2024; that sunset was not extended. New manufacturing companies now fall under the standard 22% Section 115BAA regime (25.17% effective)
• State incentives add another layer: Capital subsidies, stamp duty waivers, and electricity concessions from state governments can stack with central benefits
• Professional structuring is non-negotiable: Anti-double-benefit rules mean choosing the wrong combination of incentives can leave money on the table