Results are presented on chemically assisted ion beam etching of InP and InSb using reactive flux of iodine vapours derived from elemental iodine and A+ion beam. The effect of iodine partial pressure has been studied on the etch rate at different ion beam current densities. The etch rate increases with increase in iodine partial pressure; but above 6×10−5Torr, the trend changes depending upon ion current density. The results are discussed in terms of etch mechanism. The scanning electron microscopy and transmission electron microscopy (TEM) results show that use of iodine flux overcomes the differential etching problem associated with inert ion beam etching of In containing compound semiconductors. The high‐resolution electron microscopy shows that no crystalline defects are introduced by the use of iodine. The technique has been successfully used for anisotropic etching of 1.5 μm test patterns using Dynachem OFPR‐800 postive resist and for preparation of TEM specimen.