Sovereign Wealth Funds and Pension Funds: One step away from tax exemption on new investments?

By Hiren Shah and Alpa Shah 

Bauvard once said "Every culture has some ritual for joining two people together and making them stay that way, and ours is giving tax breaks."
However, that tax benefit or tax break should be done with much clarity to avoid any uncertainty.

One such clarity is required for exemption claims by sovereign wealth funds and pension funds under section 10(23)(FE) of the Income Tax Act, 1961.

As per section 10(23FE) of the Act, certain income, of a ‘specified person*’, in the nature of dividend, interest, long-term capital gains, etc. arising from an investment made by it in India is exempt from income-tax subject to certain conditions. One of the conditions is that the investment is made during the period April 1, 2020 to March 31, 2024.

"Specified person" amongst others includes sovereign wealth fund and pension fund specified by Central Government, by notification in the Official Gazette subject to fulfilling the conditions as detailed.

Finance Bill, 2024 proposes to extend the period of making investment from March 31, 2024, to March 31, 2025.

While this is a welcome move for incentivising investments in India by sovereign wealth funds and pension funds, the Government also needs to notify such eligible funds and the notification contains various conditions which need to be satisfied for claiming the exemption.

The Central Government vide various notifications (Notification No. 95/2022/F. No. 500/SWF4/S10(23FE)/FT&TR-II(Pt.4); NOTIFICATION S.O. 64(E) [NO. 5/2024/F.NO. 500/PF11/S10(23FE)/FT&TR-II(2)], NOTIFICATION S.O. 5472(E) [NO. 106/2023/F.NO. 500/PF13/S10(23FE)/FT&TR-II]) has notified various sovereign wealth funds and pension funds which qualify for exemption under section 10(23FE) of the Act.

Further, such notifications include the conditions which need to be fulfilled. One of the conditions mentioned in the notifications is that the said exemption would be available to the notified investor in respect of the eligible investment made on or after the date of publication of the notification and before March 31, 2024.

For the specified person, i.e. notified sovereign wealth fund and pension fund to claim exemption under Section 10(23FE) for investments made during the extended period of April 1, 2024, to March 31, 2025, it may be useful if the government issues necessary clarification/notification in this regard.

In absence of such clarification/notification, the funds may not be able to claim exemption under section 10(23FE) of the Act in respect of qualifying income arising from investments during such extended period.

Notified funds may need to consider the above while claiming exemption under Section 10(23FE) of the Income Tax Act.

Hiren Shah and Alpa Shah are with Deloitte Haskins & Sells LLP. Views are personal, and do not represent the stand of this publication.