Budget 2026-27: Recalibrating the tax framework for sovereign wealth funds

India's masterstroke was the red carpet rollout for sovereign wealth funds in 2020 with an exemption for income from investments in specified Infrastructure

In 2025, inflows from state-owned funds (sovereign wealth funds, or SWFs) to India dropped by 72 per cent from $20.1 billion in 2024 to $5.7 billion. In contrast, globally the same year, the aggregate transaction value for SWF-backed deals reached $200 billion, marking a 198.4 per cent increase from the 2024 transaction value of $66.99 billion. 

Since SWFs are typically long-term investors, this divergence between India and global trends suggests that despite India’s macro-stability and robust growth potential, SWFs are structurally more cautious and selectively bullish relative to PE/VC (private equity/venture capital) investors, who have a much higher risk appetite — whether around policy predictability or regulatory complexity. 

Invesco’s 2025 report on sovereign wealth funds rates how political and regulatory choices, once viewed as secondary considerations, have become central to how investors shape their strategies. Interestingly, the report also notes that India remains a major focus area in emerging markets. This article discusses some tax and regulatory cobwebs that impede SWF investments in India. 

India’s masterstroke was the red carpet rollout for sovereign wealth funds in 2020 with an exemption for income (dividend, interest and long-term capital gains) from investments in specified infrastructure by these funds. While the intent to attract capital was essential, questions surrounding a clear articulation of ‘eligible’ investors (for funds established prior to 2021) and associated reporting and compliance requirements caused regulatory challenges. 

The exemption has been mired in a host of administrative circulars imposing eligibility criteria.  This, coupled with the risks of characterisation for commercial investors versus sovereign actors has resulted in interpretative discretion and ex-ante certainty. 

In comparison, most developed countries provide near-blanket exemptions on passive forms of income earned by sovereign wealth funds. In the US, income earned by SWFs from investing in stocks, bonds, or other financial securities is not taxed. The US exempts income from owning shares in real estate investment trusts (REITs). The UK exempts sovereign immune persons from UK direct taxes such as income tax, capital gains tax, and corporation tax. Singapore also provides an exemption on all passive incomes earned by SWFs. 

As the US grows into a powerhouse for high growth and future-resilient sectors, such as artificial intelligence (AI), cloud computing, biotech, data centres and hyperscalers, urban infrastructure, and semi-conductor technology, it becomes a naturally attractive proposition for SWFs that are now seeking long-term, scalable and innovation-driven returns from businesses. Regulatory focus in India for incentivising these sectors could perhaps attract more interest from SWFs, considering the mammoth scale of investments of late in India. 

India risks missing a rare window to attract patient, long-horizon capital from sovereign wealth funds. While India has undeniable scale, an increasingly adaptable and tech-savvy talent pool, and a vibrant startup and manufacturing base, the realm of global sovereign capital still gravitates to jurisdictions that offer three things India must strengthen: Predictability, speed, and bankability. 

These reinforce the need for India to design and orchestrate a policy response that is swift and dynamic, to address the gaps between its potential and actual sovereign inflows over the next five-year period. 

The policy response should be practical and time-bound. First, hard-wire predictability: Commit to multi-year, sunset-dated frameworks for priority sectors, with clarity in eligibility rules, and protection against retrospective changes. 

Second, compress timelines through a genuine single-window system that delivers regulatory certainty for sectors that entail long-horizon SWF investments. 

Third, India needs to make projects more attractive to investors. The need to curate an SWF investor tax desk and regime is more urgent than ever. Fourth, clarify the reach of GAAR (general anti-avoidance rules) and judicial doctrines governing the 

anti-avoidance of SWFs. Fifth, facilitate investments by SWFs in InvITs/REITs (infrastructure/real estate investment trusts) for digital infrastructure, to support startups and innovation. 

Sixth, address the risks to contract enforcement by speeding up arbitration. A push to publish standard dispute resolution clauses to facilitate any form of dispute resolution with SWFs will augur well. 

Finally, build a national SWF outreach programme with state-level “investable menus” of shovel-ready parks, fab-ready sites, grid-connected data-centre zones, and biotech clusters, each pre-cleared, priced, and paired with plug-and-play utilities. SWFs invest where they see realistic pipelines, competent execution partners, and the holy grail of continuity across political cycles. 

If India matches its ambition with a coherent, execution-focused playbook and directly incentivises the sectors that attract sovereign capital, starting with the Budget announcements this year, SWFs will not just participate at the margins, they will well and truly become cornerstones of India’s growth story. 

The writers are partners at BMR Legal Advocates