SEZ vs STPI vs EOU for IT/Export Companies in India

By Priya Sharma | Updated March 2026

Foreign IT companies entering India face a choice that used to be straightforward: set up in a Special Economic Zone (SEZ), register under the Software Technology Parks of India (STPI) scheme, or operate as an Export Oriented Unit (EOU). Each scheme was built for a different era of Indian trade policy, and their benefits have diverged dramatically since 2020.

The headline: SEZ units that commenced operations before April 1, 2021 still enjoy income tax deductions under Section 10AA — 100% for the first 5 years, then 50% for the next 10 years. STPI and EOU income tax holidays expired in 2011 and 2012 respectively, with no extensions. For a new foreign IT company in 2026, the income tax benefit that once made these schemes attractive is available only to SEZ units already within their 15-year window. New SEZ units set up after April 2021 cannot claim Section 10AA at all.

That does not make STPI and EOU irrelevant. STPI remains the most popular registration for IT exporters in India — over 10,600 units generated INR 10.64 lakh crore in software exports in FY 2024-25. The scheme's real value today is duty-free imports, data connectivity infrastructure, and simplified export compliance. Understanding which scheme fits your company requires looking beyond tax holidays.

Quick Comparison Table

The Tax Reality in 2026: Why the Old Playbook Is Broken

Between 2005 and 2020, the decision was simple: if you wanted tax-free export income, choose SEZ. Section 10AA offered 100% deduction on export profits for the first 5 years, 50% for the next 5, and 50% on reinvested profits for 5 more — a full 15-year runway.

Two sunset clauses changed everything. The STPI/EOU income tax holiday under Sections 10A and 10B expired on March 31, 2011, and March 31, 2012, respectively. The government extended it multiple times before finally drawing the line. For SEZ units, Section 10AA's sunset clause means only units that commenced operations before April 1, 2021 qualify. A foreign company setting up a new SEZ unit today gets customs duty exemptions and GST benefits, but zero income tax deduction under 10AA.

This changes the calculus fundamentally. A new IT company in 2026 pays 22% corporate tax under Section 115BAA regardless of whether it sits in an SEZ, registers under STPI, or operates as an EOU. The concessional 22% rate under the new tax regime has made the old scheme-based tax holidays less relevant for new entrants.

Customs and Import Benefits: Where Real Savings Remain

Even without income tax advantages, all three schemes offer meaningful customs duty savings. For hardware-intensive IT operations, R&D labs, or companies importing specialized equipment, these savings are material.

SEZ units get the broadest exemption: BCD (Basic Customs Duty), Social Welfare Surcharge, and IGST are all exempt on imports of capital goods, raw materials, office equipment, and consumables. Domestic procurement into SEZs is treated as zero-rated supply under the IGST Act 2017 — the domestic supplier claims refund and the SEZ unit pays no tax.

STPI units can import capital goods, computer hardware, and software duty-free, provided these are used for export activities. The STPI scheme also provides data communication infrastructure — high-speed leased lines and internet connectivity — through STPI's own network, which was the scheme's original raison d'etre. For IT companies needing reliable international bandwidth, STPI centers in Tier-2 cities often provide better connectivity than commercial alternatives.

EOUs import capital goods and raw materials duty-free into bonded premises. The key restriction: goods must remain within the bonded area and are subject to customs supervision. If an EOU wants to sell goods domestically (DTA sales), it must pay applicable customs duties on those goods. DTA sales are capped at 50% of FOB value of exports, as specified in Para 6.08 of the Foreign Trade Policy.

STPI's Hidden Value: Data Connectivity

STPI's most underrated benefit in 2026 is not tax-related. The organization operates 59 centers across India, including Tier-2 and Tier-3 cities, providing dedicated international data communication links for software exporters. For a foreign IT company setting up a development center in a city like Coimbatore, Bhubaneswar, or Jaipur, STPI registration provides high-speed connectivity infrastructure that might otherwise require months of negotiation with private ISPs. STPI-registered units contributed 2.98 lakh jobs in non-metro cities as of March 2025.

Which Should You Choose?

Choose SEZ if:

• You acquired or are acquiring a unit that commenced operations before April 1, 2021 — the Section 10AA benefit is worth INR 50+ lakh annually on INR 5 crore export profit
• Your operations are import-heavy (hardware, equipment, lab instruments) and you want comprehensive customs duty exemptions
• You can commit to 100% export and do not need to serve the Indian domestic market
• You are comfortable with higher compliance: separate books of accounts, annual performance reports to Development Commissioner, and customs bonding requirements
• Your business model does not require location flexibility — you can anchor in one SEZ for the long term

Choose STPI if:

• You are a new IT/ITES company entering India in 2026 — STPI offers the best balance of benefits and flexibility
• You need location freedom: STPI units can operate from any city, any commercial building, any co-working space
• You want simplified export compliance through SOFTEX filings and centralized forex reporting
• You need data communication infrastructure, especially in Tier-2 cities where STPI provides dedicated international links
• Your primary goal is duty-free import of hardware and software for export operations
• You want moderate compliance burden without customs bonding or bonded warehouse requirements

Choose EOU if:

• You are in manufacturing (electronics hardware, pharma, textiles) rather than pure IT services
• You want duty-free import of raw materials and consumables for production, not just capital goods
• You can maintain positive NFE within the 5-year block period
• You need the option to sell up to 50% of production domestically (on payment of duties)
• You can operate from bonded premises under customs supervision

Common Mistakes

• Assuming SEZ still offers income tax exemption to new units — The Section 10AA sunset clause ended on April 1, 2021. New SEZ units set up after this date get customs and GST benefits only. Foreign companies entering India in 2026 expecting a 15-year tax holiday will be disappointed.
• Choosing SEZ for the prestige when STPI offers better flexibility — SEZ requires physical presence in a notified zone, separate books of accounts, and Development Commissioner oversight. If your IT company does not import significant hardware, STPI registration from any commercial space in India offers better operational freedom at lower compliance cost.
• Ignoring STPI because its tax holiday expired — The income tax benefit ended in 2011, but STPI remains India's most widely used IT export scheme with 10,600+ units. The real benefits are duty-free imports, SOFTEX-based export compliance, and data connectivity infrastructure.
• Confusing EOU's DTA sales limit with free domestic selling — EOUs can sell domestically up to 50% of FOB export value, but they must pay full customs duty on DTA sales. This is not a domestic market access benefit — it is a pressure valve for surplus production.
• Not evaluating the 22% concessional tax regime first — Under Section 115BAA, any domestic company (including wholly owned subsidiaries of foreign companies) pays 22% corporate tax with no need for any scheme registration. For pure IT services companies with minimal imports, the concessional tax rate may make scheme registration unnecessary.

Practical Example

NovaTech GmbH, a German software company, plans to set up a 200-person development center in India for application development and testing. Annual revenue projection: INR 20 crore (all export). Annual import of hardware and equipment: INR 1.5 crore.

Option A: SEZ Unit (New, Post-2021)

Corporate tax at 25.17% effective rate on INR 20 crore profit = INR 5.03 crore. Customs duty saved on INR 1.5 crore imports (assuming 20% average duty) = INR 30 lakh saved. Compliance cost: INR 8-12 lakh/year (separate books, DC filings, customs bonding). Location: restricted to available SEZ space. Net benefit: INR 18-22 lakh customs savings after compliance costs.

Option B: STPI Registration

Corporate tax identical: INR 5.03 crore. Customs duty saved on hardware imports = INR 30 lakh. Compliance cost: INR 3-5 lakh/year (SOFTEX filings, annual report). Location: any commercial space in any Indian city. Data connectivity: STPI-provided international links. Net benefit: INR 25-27 lakh customs savings after compliance costs, plus location flexibility.

Option C: EOU

Corporate tax identical: INR 5.03 crore. Customs duty saved = INR 30 lakh. Compliance cost: INR 10-15 lakh/year (bonded premises, customs supervision, NFE calculations). Location: bonded facility only. Net benefit: INR 15-20 lakh customs savings after compliance costs.

Verdict: NovaTech should choose STPI registration. The income tax is identical across all three options for a new 2026 entrant. STPI gives the same customs savings with lower compliance costs and complete location flexibility. If NovaTech were importing INR 10+ crore in specialized hardware annually, the SEZ's broader duty exemptions might shift the equation.

Key Takeaways

• SEZ Section 10AA income tax deduction is only available to units that commenced operations before April 1, 2021 — new units in 2026 do not qualify for income tax benefits
• STPI income tax holiday (Section 10A) expired in 2011, and EOU income tax holiday (Section 10B) expired in 2012 — neither has been renewed
• All three schemes still offer meaningful customs duty exemptions on imports of capital goods, hardware, and equipment for export operations
• The Section 115BAA concessional corporate tax rate of 22% applies to all domestic companies regardless of scheme, making the old tax-holiday-driven decision framework obsolete
• STPI is the best choice for most new foreign IT companies in 2026: no location restriction, moderate compliance, duty-free imports, and STPI-provided data connectivity in 59 centers
• EOUs are best suited for manufacturing-export operations requiring duty-free raw material imports and bonded premises, not for IT services companies

Evaluating which export scheme fits your India operations? Beacon Filing's India entry strategy advisory covers scheme selection, FDI compliance, entity setup, and ongoing compliance management — all from a single team.