Software Export Revenue (Section 10AA SEZ)

What Is Software Export Revenue (Section 10AA SEZ)?

Section 10AA rewards units set up in a Special Economic Zone by exempting a portion of the profit they earn from exports. For an IT or software unit, that means the profit attributable to exporting software and IT services can be deducted from taxable income on a tapering scale over fifteen years — a powerful incentive to locate export operations inside an SEZ.

An Indian SEZ software unit meets this in its annual tax computation, where the export profit is worked out and the 10AA deduction claimed, supported by an accountant's report. Two limits define eligibility. First, the scheme has a sunset: only units that began operations by 31 March 2021 can claim it, so the benefit is now a run-off of existing units rather than new entrants. Second, a company that opts for the concessional 22% tax regime under Section 115BAA must forgo the 10AA deduction — the two are mutually exclusive.

How Software Export Revenue (Section 10AA SEZ) Works

The deduction is built up from export income to tax computation through a set path:

1. 1Identify SEZ export turnover

   The unit separates export turnover of software/IT services from any domestic turnover — the base of the formula.

2. 2Compute profit of the unit

   Profit derived from the SEZ unit's exports is worked out, with common costs allocated fairly.

3. 3Apply the deduction formula

   Export profit is scaled by export turnover over total turnover to get the deductible amount.

4. 4Apply the year-of-operation slab

   The deduction is 100% for the first 5 years, 50% for the next 5, and 50% of ploughed-back reserve for the final 5.

5. 5Support with the accountant's report

   The claim is backed by the prescribed accountant's report and reflected in the return.

Where Software Export Revenue (Section 10AA SEZ) Applies — IT and Software Companies

Section 10AA is relevant to software exporters operating from within an SEZ:

• SEZ IT/ITeS units — Software and IT-services units located in a notified SEZ claim the export-profit deduction.
• Pre-sunset units in run-off — Only units that commenced by 31 March 2021 continue to enjoy the tapering benefit.
• Units in the 50% reserve phase — Units in years 11–15 must route the deduction through the SEZ re-investment reserve.
• Groups weighing 115BAA — Companies deciding between the 10AA benefit and the 22% concessional regime must model both.
• Export-heavy delivery centres — Delivery centres with high export turnover gain most from the deduction.

See also: IT & Software Company Accounting Services SaaS Accounting Services (IT & SaaS) Financial Statement Preparation

Statutory Position on Software Export Revenue (Section 10AA SEZ)

Section 10AA of the Income Tax Act 1961 allows a deduction on profits derived from the export of articles, things or services by a unit in a Special Economic Zone: 100% of the export profit for the first five consecutive years, 50% for the next five, and 50% for a further five years subject to crediting the amount to a Special Economic Zone Re-investment Reserve and using it as prescribed. A sunset applies — the unit must have begun to manufacture or provide services on or before 31 March 2021 (extended under TOLA) to be eligible. A company opting for the concessional regime under Section 115BAA cannot claim the 10AA deduction.

• Deduction pattern — 100% (years 1–5), 50% (years 6–10), 50% via SEZ re-investment reserve (years 11–15). Law stated as at 22 July 2026.
• Sunset — Unit must have commenced operations on or before 31 March 2021 (TOLA-extended).
• Regime interaction — Not available if the company opts for Section 115BAA concessional tax.
• Support — Claim backed by the prescribed accountant's report filed with the return.

Software Export Revenue (Section 10AA SEZ): A Practical Example

A Noida SEZ software unit that began operations in 2019 has ₹10 crore turnover, of which ₹9 crore is export, and ₹3 crore of profit. The export profit is ₹2.7 crore (profit scaled by export over total turnover). In its third eligible year it claims a 100% Section 10AA deduction of ₹2.7 crore, backed by an accountant's report. Its group first confirms it is not opting for the 115BAA regime, since that would forfeit this deduction entirely.

Common Mistakes With Software Export Revenue (Section 10AA SEZ)

10AA claims fail on eligibility, the formula or the regime clash:

• Claiming for a post-sunset unit — A unit that began after 31 March 2021 claiming 10AA is ineligible → confirm the commencement date meets the sunset.
• Using turnover, not export profit — Deducting on export turnover rather than export profit overstates the claim → apply the profit × export/total-turnover formula.
• Clashing with 115BAA — Claiming 10AA while opting for the 22% regime is invalid → choose one; the two are mutually exclusive.
• Skipping the reserve in years 11–15 — Taking the third-phase 50% without the SEZ re-investment reserve fails the condition → route it through the reserve.
• Weak export documentation — Claiming without SOFTEX/realisation and the accountant's report invites disallowance → keep the full export evidence trail.

Related Accounting Terms

Terms an SEZ IT unit meets alongside the 10AA deduction:

• Foreign Currency Receivables — Export receivables behind the exempt profit.
• Transfer Pricing for IT Services — Arm's-length pricing on group exports.
• Deferred Revenue (Unearned Revenue) — Advance billings recognised over time.
• Accounting Terms Glossary — Browse every accounting term in one place.