India mulls tax exemption for sovereign wealth funds’ equity gains amid heavy foreign outflows

Mumbai: Amid a large stock sell-off by foreign fund managers in 2025, New Delhi has received a proposal to exempt Sovereign Wealth Funds (SWFs) and certain pools of offshore patient capital from tax on their earnings from the Indian equity market.

The idea was mooted at a recent meeting held by the government with senior professionals and industry representatives.

So far, tax exemptions for SWFs and pension funds have largely been confined to income from investments in Indian infrastructure entities. This tax relief on dividend income and long-term capital gains, subject to a minimum holding period of three years, was introduced to attract stable capital for infrastructure development.

"What is now being suggested is to extend the tax benefit to market investments in listed securities by categories of entities such as SWFs, which typically commit long-term capital and are not taxed in their home jurisdictions," a person familiar with the deliberations told ET.

Sovereign funds are generally not taxed in their home countries as they are considered arms of their respective governments, with earnings credited to the government's account rather than accruing to any private individual.

"The proposal was well received and we believe there is a possibility that it may be examined ahead of the Budget. Linked to this, a broader question that emerged during the discussions was whether such benefits should also be extended to certain other categories of foreign portfolio investors (FPIs), such as pension and endowment funds, which, like SWFs, typically enjoy income tax exemptions in their jurisdictions, particularly in the US. Any such proposal, however, would need to be carefully weighed against potential revenue implications," the person said.

The suggestion assumes significance in the wake of equity sales by FPIs in 2025, which have resulted in a net outflow of ₹1.58 lakh crore, or around $18 billion.

The Securities and Exchange Board of India (Sebi), which has recently consulted experts to gather ideas to improve capital inflows, has also received a similar suggestion relating to tax concessions for select categories of foreign investors such as SWFs registered as FPIs. While SWFs, unlike other FPIs, may be driven more by long-term economic objectives such as diversification and wealth preservation than by tax considerations, a tax exemption could nonetheless send the right signal to providers of patient capital.

FPIs currently pay 12.5% and 20% tax on long-term and short-term capital gains, respectively, and over 30% tax on income from equity derivatives traded on Indian exchanges. However, funds that invest in India through entities based in Mauritius and Singapore, and are considered tax residents there, pay no tax on their derivative profits under the tax treaties India has with these countries.

Under the circumstances, the proposed benefits for SWFs and other select categories of FPIs could be implemented through amendments to the Income Tax Act without requiring any changes to existing tax treaties. While the interaction between tax treaties and domestic law can be complex and varies across jurisdictions, a widely accepted principle is that tax treaties prevail where they are more beneficial to the taxpayer.

Another submission made during the pre-Budget consultations relates to extending certain fiscal incentives for corporate spending on research and development (R&D).