What is the meaning of IFS=$'\n' in bash scripting?

IFS stands for "internal field separator". It is used by the shell to determine how to do word splitting, i. e. how to recognize word boundaries.

Try this in a shell like bash (other shells may handle this differently, for example zsh):

mystring="foo:bar baz rab"
for word in $mystring; do
  echo "Word: $word"
done

The default value for IFS consists of whitespace characters (to be precise: space, tab and newline). Each character can be a word boundary. So, with the default value of IFS, the loop above will print:

Word: foo:bar
Word: baz
Word: rab

In other words, the shell thinks that whitespace is a word boundary.

Now, try setting IFS=: before executing the loop. This time, the result is:

Word: foo
Word: bar baz rab

Now, the shell splits mystring into words as well -- but now, it only treats a colon as the word boundary.

The first character of IFS is special: It is used to delimit words in the output when using the special $* variable (example taken from the Advanced Bash Scripting Guide, where you can also find more information on special variables like that one):

$ bash -c 'set w x y z; IFS=":-;"; echo "$*"'
w:x:y:z

Compare to:

$ bash -c 'set w x y z; IFS="-:;"; echo "$*"'
w-x-y-z

Note that in both examples, the shell will still treat all of the characters :, - and ; as word boundaries. The only thing that changes is the behaviour of $*.

Another important thing to know is how so-called "IFS whitespace" is treated. Basically, as soon as IFS includes whitespace characters, leading and trailing whitespace is stripped from the string to be split before processing it and a sequence of consecutive whitespace characters delimits fields as well. However, this only applies to those whitespace characters which are actually present in IFS.

For example, let's look at the string "a:b:: c d " (trailing space and two space characters between c and d).

1. With IFS=: it would be split into four fields: "a", "b", "" (empty string) and " c d " (again, two spaces between c and d). Note the leading and trailing whitespace in the last field.
2. With IFS=' :', it would be split into five fields: "a", "b", "" (empty string), "c" and "d". No leading and trailing whitespace anywhere.

Note how multiple, consecutive whitespace characters delimit two fields in the second example, while multiple, consecutive colons don't (since they are not whitespace characters).

As for IFS=$'\n', that is a ksh93 syntax also supported by bash, zsh, mksh and FreeBSD sh (with variations between all shells). Quoting the bash manpage:

Words of the form $'string' are treated specially. The word expands to "string", with backslash-escaped characters replaced as specified by the ANSI C standard.

\n is the escape sequence for a newline, so IFS ends up being set to a single newline character.

Inside dollared single quotes, some characters are evaluated specially. For example, \n is translated to new line.

So, this particular line assigns newline to the variable IFS. IFS, in turn, is a special variable in bash: Internal Field Separator. As man bash says, it

is used for word splitting after expansion and to split lines into words with the read builtin command. The default value is <space><tab><newline>.

For short, IFS=$'\n' assign newline \n to variable IFS.

$'string' construct is a quoting mechanism which use to decode ANSI C like escape sequences. This syntax comes from ksh93, and was portable to modern shell like bash, zsh, pdksh, busybox sh.

This syntax is not defined by POSIX, but was accepted for SUS issue 7.

Trick with IFS=$'\n' (and Readline behavior on ambiguous completion) used to emulate menu-like completion with descriptions:

_xxx() {
    local IFS=$'\n'
    local args="--AAA  - AAA to aaa
--BBB   - BBB for bbb"
    COMPREPLY=( $(compgen -W "$args" -- "${COMP_WORDS[COMP_CWORD]}") )
    if [[ ${#COMPREPLY[*]} -eq 1 ]]; then
        COMPREPLY=( ${COMPREPLY[0]%%  *} )
    fi
} && complete -F _xxx xxx

I prefered to explain $IFS via example:
Suppsoe you want to cp or mv or another file proccessing, IFS is empty by defualt, When your files have meta char or space such as :
Linux Administration.pdf or Free Software Fundation.ogg , Sure you'll have probelm, Because : Linux consider a seperate param and Administartion consider a seperate param.So bash has built-in variable , Then you can initialize to IFS==$(echo -en "\n\b") , Then bash discard any meta char and space between file name, For example:

#!/bin/bash
SAVEIFS=$IFS
IFS=$(echo -en "\n\b")
mymusicdir=~/test/dd
find $mymusicdir -name "*" -execdir rename 's/ /_/g' "{}" +
IFS=$SAVEIFS