Bengaluru: Karnataka has rolled out an incentive-heavy package to attract fresh investments in the aerospace and defence sector, offering investors subsidies on land, capital expenditure and production, along with stamp-duty exemptions, land-conversion fee reimbursement and, for smaller enterprises, a complete exemption from electricity tariff tax for several years.
However, the new Karnataka Aerospace & Defence Policy 2026-31 does not promise free land to companies. Instead, the government will subsidise the cost of land for select anchor investors in proposed aerospace and defence clusters, with the subsidy going up to 50% outside Bengaluru.
The policy, valid for five years, aims to attract Rs 60,000 crore in investments and create more than 60,000 direct and indirect jobs in the aerospace and defence value chain.
Up to 50% subsidy on land cost
One of the most significant incentives is linked to the seven aerospace and defence clusters proposed across Karnataka.
The first three investments in each of the proposed clusters, once the clusters are formally notified, will be eligible for a 50% subsidy on land cost in clusters outside Bengaluru, while investors in clusters in Bengaluru Urban and Bengaluru Rural will get a 25% land-cost subsidy.
The proposed clusters include runway-access manufacturing sites in Vijayapura, Shivamogga, Mysuru and Hassan, besides specialised clusters for avionics at Jangamakote, space manufacturing at Chitradurga and UAV/Urban Air Mobility at Chikkaballapura.
This is distinct from free land: the policy does not say that the government will hand over land without cost to companies.
The government also proposes to support the creation of industrial parks with roads, power, water supply, R&D and testing facilities, common warehouses, training infrastructure and plug-and-play facilities.
For private industrial park developers, the policy provides a 10% capital subsidy on the value of fixed assets invested in buildings and infrastructure. It also provides exemption from stamp duty and a concessional registration charge of Rs 1 per Rs 1,000 for specified transactions.
Key incentives at a glance
| Incentive | What Karnataka offers |
|---|---|
| Land | 50% land-cost subsidy for first 3 investors in clusters outside Bengaluru; 25% in Bengaluru Urban/Rural |
| Capital subsidy – focus sectors | 30% Zone 1; 27.5% Zone 2; 25% Zone 3 |
| PLI – focus sectors | 3.5%, 3% and 2.5% respectively |
| Stamp duty | 100% exemption for focus-sector large investments |
| Registration | Rs 1 per Rs 1,000 |
| Land conversion | 100% reimbursement for focus-sector large investments |
| Electricity tariff tax – MSMEs | 100% exemption for 4–7 years depending on zone |
| Power subsidy – micro/small | Rs 1 per unit for three years |
| Employment booster | Additional 7.5%, 10% or 15% |
| Women workforce booster | Additional 7.5%, 10% or 15% |
| R&D/manufacturing co-location | 10% booster |
| Green investments | 50% of eligible equipment costs, subject to ceilings |
| Ultra-large projects | Special package for investments above Rs 1,000 crore |
| Integrated end assembly | Special package from Rs 750 crore investment |
Large aerospace projects can get up to 30% capital subsidy
For large, mega and ultra-mega companies in the policy’s eight focus areas, the government has offered a choice between a capital investment subsidy and a production-linked incentive.
The eight focus areas are integrated aircraft and engine assembly, civil and defence MRO, space manufacturing, advanced materials, aerospace and defence electronics, unmanned aerial systems, eVTOL/advanced air mobility and ammunition.
For these focus sectors, the capital investment subsidy is 30% of the value of fixed assets in Zone 1, 27.5% in Zone 2 and 25% in Zone 3.
The alternative is a production-linked incentive of 3.5% of sales turnover in Zone 1, 3% in Zone 2 and 2.5% in Zone 3.
Importantly, the value of fixed assets includes land, plant and machinery and buildings, making the capital subsidy particularly significant for projects involving large land and infrastructure investments.
For projects opting for the PLI route, the total incentives can go up to 65% of the value of fixed assets in Zones 1 and 2 and 45% in Zone 3, subject to the conditions in the policy.
For other aerospace and defence sub-sectors outside the eight focus areas, the capital subsidy is 25% in Zone 1, 20% in Zone 2 and 15% in Zone 3, or investors can opt for PLI of 2.5%, 2.25% and 2%, respectively.
No general tax holiday, but MSMEs get electricity-tax exemption
The policy does not provide a blanket GST or income-tax holiday for aerospace and defence companies.
But MSMEs get a significant electricity-related concession. The tax on electricity tariff is exempted by 100% for:
- Seven years in Zone 1
- Six years in Zone 2
- Four years in Zone 3
For special-category entrepreneurs — including SC/ST, women, minorities, persons with disabilities and ex-servicemen — the exemption is extended by one year in each zone: eight, seven and five years respectively.
Micro and small enterprises will also receive a Rs 1 per unit power subsidy for three years across all zones. 12508-8-49
This is perhaps the clearest tax-related incentive in the policy. The document does not prescribe a broad exemption from GST or other central taxes.
Stamp duty almost entirely waived
Companies also get substantial relief on transaction costs.
For large and above enterprises in the focus sectors, the policy provides 100% exemption from stamp duty and registration charges of only Rs 1 per Rs 1,000.
For other aerospace and defence sub-sectors, stamp-duty exemption is 100% in Zone 1 and 75% in Zones 2 and 3.
The concessions also cover specified loan agreements, mortgages, hypothecation deeds and transactions involving industrial plots, sheds and industrial tenements.
MSMEs receive 100% stamp-duty exemption in Zones 1 and 2, while the general category gets 75% in Zone 3. Special-category MSMEs receive 100% exemption across all three zones.
Land-conversion charges also reimbursed
For MSMEs, the government will reimburse 100% of land-conversion fees in Zones 1 and 2 and 75% in Zone 3 for the general category.
For the special categories, the reimbursement is 100% in all zones.
For large and above focus-sector investments, the policy provides 100% reimbursement of land-conversion fees.
Extra money for jobs and women employees
The government is also tying incentives to employment generation.
Large, mega and ultra-mega projects that create substantially more employment than the minimum requirement can receive an additional incentive of 7.5%, 10% or 15% on the base capital subsidy or PLI, depending on how many times they exceed the minimum employment threshold.
There is a similar booster for employing women. Companies with women accounting for 50% or more of their workforce get a 7.5% booster; the incentive rises to 10% for 60% or more and 15% for 70% or more.
The policy gives an example of an Rs 800-crore project in Zone 2. If the project creates 1,400 jobs against a minimum threshold of 400, the 7.5% employment booster would raise the capital subsidy from 20% to 21.5% of fixed assets. In another example, a project with 65% women employees gets a 10% booster over its PLI.
10% booster for companies that combine R&D and manufacturing
Companies setting up manufacturing facilities alongside an R&D operation in Karnataka get another incentive.
Large, mega and ultra-mega companies can receive a 10% booster on the capital subsidy for manufacturing. If they opt for PLI, they get a 10% booster on the PLI, with an additional 5% increase in the applicable VFA limit.
The R&D facility, however, must meet prescribed conditions, including a minimum investment of Rs 250 crore or 25% of VFA, whichever is lower, and minimum employment of 100.
Green investments get additional subsidies
The policy also provides a separate sustainability-linked package.
For large investments, the government will subsidise 50% of the equipment cost, subject to specified ceilings, for projects such as effluent treatment plants, waste-management facilities, zero-liquid-discharge systems, air-pollution control equipment and energy-efficiency measures.
For example, waste-disposal projects can get up to Rs 5 crore, while zero-liquid-discharge and air-pollution-control measures can get up to Rs 1 crore each. Industrial EVs can receive a subsidy of 10% of the cost, up to Rs 20 lakh.
Companies securing GreenCo certification can also receive additional incentives over the base subsidy, depending on their rating.
Rs 750 crore projects can qualify for a special package
The policy leaves the door open for larger negotiations.
Investments of more than Rs 1,000 crore, as well as investments in sunrise sectors, can receive special incentive packages on a case-by-case basis.
More significantly, integrated end-assembly projects can qualify for a special package with a minimum investment of Rs 750 crore.
Government also promises faster clearances
The incentives are accompanied by an attempt to reduce the regulatory burden. The policy says investors will have access to Karnataka’s Single Window system, with digital application processing, integrated clearances, application tracking and incentive-claim processing.
The government also says investors can avail a moratorium from obtaining certain approvals for three years or until commercial operations begin, covering 15 approvals including building-plan approval, factory-plan approval and non-agricultural land conversion.
But incentives come with conditions
The package is not an unconditional grant.
The policy requires new enterprises to provide at least 70% employment to local people overall and 100% for Group D employees. Compliance will be monitored for five years, and failure can lead to recovery of incentives and concessions.
The benefits are primarily for new investments and capacity expansion. Existing companies seeking incentives for expansion, diversification or modernisation must make an additional investment of at least 25% of their existing investment.
