A Special Economic Zone (SEZ) is a specifically demarcated, duty-free enclave that is treated as foreign territory for the purposes of trade operations, duties and tariffs. SEZs exist to promote exports, attract domestic and foreign investment, and generate employment. In India they are governed by the Special Economic Zones Act, 2005 and the SEZ Rules, 2006, administered by the Department of Commerce under the Ministry of Commerce and Industry.
Who approves and runs an SEZ
A three-tier structure controls the regime. The Board of Approval (BoA) clears developer and zone proposals, a Development Commissioner (DC) supervises each notified zone, and a Unit Approval Committee sanctions individual units through a Letter of Approval (LoA), valid five years for commencing operations. Approvals are largely delivered through a single-window mechanism with self-certification.
Types of SEZ and land requirements
- Multi-sector (formerly "multi-product") SEZ
- Sector-specific SEZ
- Free Trade and Warehousing Zone (FTWZ)
- IT/ITeS, biotech and health-services SEZ
- Port-based and airport-based SEZ
The old thresholds of 1,000 hectares for multi-product and 100 hectares for sector-specific zones have been progressively lowered. The general minimum contiguous area is now 50 hectares (25 hectares in specified hilly and north-eastern states), with no minimum area for IT/ITeS, biotech or health-services SEZs. The SEZ (Amendment) Rules, 2025 reduced the floor to 10 hectares for zones dedicated to semiconductor and electronic-component manufacturing.
Tax and duty benefits
SEZ units historically enjoyed a profit-linked income-tax holiday under Section 10AA of the Income-tax Act, 1961:
| Period from start of production | Deduction on export profits |
|---|---|
| Years 1–5 | 100% |
| Years 6–10 | 50% |
| Years 11–15 | 50% (via transfer to the SEZ Re-investment Reserve) |
Crucially, this holiday is subject to a sunset clause: only units that began manufacturing or providing services on or before 31 March 2020 can claim it. A new SEZ unit set up today does not get the Section 10AA income-tax holiday, and a company that has opted for the 22% concessional rate under Section 115BAA cannot claim it either. MAT/AMT (Sections 115JB and 115JC) also now applies to SEZ units and developers.
Benefits that continue regardless of the sunset include:
- Duty-free import and domestic procurement of capital goods, raw materials and consumables for authorised operations, since an SEZ sits outside the customs territory of India.
- Supplies to SEZ units and developers are zero-rated under Section 16 of the IGST Act, 2017, made under a Letter of Undertaking (LUT) or bond (Rule 96A) without paying IGST, or with a refund.
- Simplified customs procedures and single-window clearance.
Key compliance obligations
- The unit must earn positive Net Foreign Exchange (NFE), calculated cumulatively over a block of five years (Rule 53) and reported in the Annual Performance Report to the Development Commissioner.
- Goods cleared into the Domestic Tariff Area (DTA) attract the applicable customs duty and IGST; DTA sales are permitted so long as the unit stays NFE-positive.
- Maintain proper records, file prescribed returns and renew the LoA on time.
Reforms to watch
The Development of Enterprise and Service Hubs (DESH) Bill, proposed to replace the SEZ Act, remains stalled, but a "SEZ 2.0" roadmap and the 2025 amendments for semiconductors and electronics signal the direction of change. When you build the business case for an SEZ today, base it on the duty and operational benefits rather than the lapsed income-tax holiday, and take current-year advice from a qualified professional.