Section 10(23FE) of Income Tax Act — Exemption for Sovereign Wealth Funds and Pension Funds

Infrastructure is expensive. Roads, ports, & power plants need billions — and no country can finance it alone. To bring in steady foreign capital, India introduced Section 10(23FE) in the Finance Act 2020. It was a simple promise: if a recognized sovereign or pension fund invests patiently in India’s infrastructure, its returns won’t be taxed — provided certain conditions are met.

This policy made India one of the few emerging markets offering a clean, tax-free route to global institutional investors with a long-term mindset.

What Section 10(23FE) Actually Covers

The provision exempts income earned by specified foreign investors — mostly sovereign wealth funds (SWFs) & pension funds — if their investments are in approved Indian infrastructure projects. The exemption covers three types of income:

• Interest income from infrastructure-linked debt.
• Dividends received from eligible companies or funds.
• Long-term capital gains arising after a minimum holding period of three years.

These returns are normally taxed in India, but Section 10(23FE) sets them free from that burden.

Who Can Claim the Exemption

The law applies to two specific classes of investors called “specified persons.”

1. Sovereign Wealth Funds (SWFs) — state-owned funds that invest national reserves abroad (e.g., GIC of Singapore, Abu Dhabi Investment Authority).
2. Pension Funds — large, government-regulated retirement funds like the Canada Pension Plan Investment Board (CPPIB) or AustralianSuper.

Both are known for their long horizon and risk-averse approach — exactly the kind of capital India wants for roads, renewables, & urban transport.

Where Can They Invest?

To enjoy the benefit, the investment must be in one of the following avenues:

• Direct equity or debt in an Indian infrastructure company.
• Units of an Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT)."
• Participation through a Category I or II Alternative Investment Fund (AIF) focusing on infrastructure.

This ensures the money is tied to real projects — not short-term financial speculation.

Also Read: Exemption on Pension Funds and Retirement Benefits

Conditions for Eligibility

The exemption comes with rules that keep the focus on long-term infrastructure financing:

1. Investment window: from April 1 2020 to March 31 2025 (as per CBDT’s latest extension).
2. Holding period: minimum three years.
3. Activity restriction: the fund must not carry on any commercial operations in India apart from the investment.
4. Filing and disclosure: regular returns & statements must be filed with CBDT.

If all these boxes are ticked, the entire income from that investment remains tax-exempt.

CBDT Extends the Benefit to 2025

Recognising the slow gestation of infrastructure projects, the CBDT extends applicability of Sec. 10(23FE) exemption till March 31 2025.
This extension gives global funds more time to deploy capital & allows India to maintain a steady pipeline of foreign inflows for projects in energy, transport, and digital connectivity.

What Happens If Rules Are Broken

The benefit is not permanent. A violation of any of the conditions as stipulated in clause (23FE) — say, selling before three years or investing in a non-eligible sector — immediately voids the exemption.
The income then becomes taxable under normal provisions, and the fund may have to repay tax with interest & penalty.

Approval and Compliance

Before claiming the benefit, the fund must apply to the CBDT for recognition. It submits its constitution documents, ownership details, and a declaration of non-commercial status. Once approved & notified, the fund is treated as an eligible investor for this section.
Ongoing reporting and annual disclosures help the tax department verify continued compliance.

Example: How It Works

Suppose a Canadian pension fund invests ₹1,000 crore in a solar energy project in 2021. By 2026, it earns ₹150 crore as interest & ₹200 crore as capital gains. Since it held the investment for more than three years and complied with all conditions, this entire income is tax-free under Section 10(23FE).

If the same fund had invested in a non-infra startup, the exemption would not apply.

Also Read: Disallowance of Related Party Payments

Policy Rationale

The government wanted to build confidence among foreign investors that India values long-term commitment over short-term trading."
By making returns tax-exempt, India offset the currency &  regulatory risks these funds face. It also ensured that their capital supports core nation-building projects rather than speculative ventures.

Economic Impact

Since the provision’s introduction, billions have flowed into renewable energy, toll roads, warehousing, and telecom infrastructure. These funds not only finance projects but also bring global governance standards & discipline to the sector.

Judicial and Administrative Clarity

Over time, CBDT has issued circulars clarifying grey areas — for instance, allowing investments through holding companies & expanding eligible sectors to include social and green infrastructure. This flexibility has kept the law aligned with global investment trends.

Comparison with Similar Provisions

Together, these clauses form India’s tax-efficient infrastructure finance ecosystem.

Global View

Many countries like Australia and the UAE offer partial or full tax relief to sovereign funds. India’s approach stands out because it links the exemption directly to productive economic activity. Only income from infrastructure counts — ensuring each tax benefit translates into real development.

The Bottom Line

• Section 10(23FE) provides an exemption to sovereign wealth funds & pension funds on income from investment made in India.
• The CBDT extends applicability of Sec. 10(23FE) exemption till Mar 31 2025.
• Violation of any of the conditions as stipulated in clause (23FE) leads to loss of benefit.
• It continues to anchor India’s strategy of attracting patient, long-term foreign capital.

Also Read: The Exemption Rule Powering Mutual Funds & UTI

Final Thought

Every nation needs money to build, but India chose to build smart — by partnering with global institutions that stay for the long haul. Section 10(23FE) reflects that philosophy beautifully: reward those who invest not just money, but trust and time.

At CallMyCA.com, our CA team helps foreign funds, business trusts, and Indian entities plan investments under Section 10(23FE), prepare CBDT applications, and stay fully compliant while maximising returns. Let us help you structure smart and stay secure.