Middle East Sovereign Wealth Funds in India: Deal Structures & Tax Exemptions

The Scale of Middle East SWF Investment in India

Section 10(23FE) of the Income Tax Act, 1961 gives specified sovereign wealth funds a 100% income tax exemption on dividends, interest, and long-term capital gains from eligible investments in India, and the Finance Act, 2025 extended the investment deadline five years, to March 31, 2030. (For tax years beginning on or after 1 April 2026, the same exemption continues under Schedule V of the Income-tax Act, 2025.) Middle Eastern funds are among the exemption's biggest users, and the six major GCC funds — Abu Dhabi Investment Authority (ADIA), Mubadala Investment Company, Saudi Arabia's Public Investment Fund (PIF), Qatar Investment Authority (QIA), Kuwait Investment Authority (KIA), and Abu Dhabi's ADQ — collectively manage assets running into several trillion US dollars.

ADIA has opened an office at Gujarat International Finance Tec-City (GIFT City) to oversee current and future investments in India. Mubadala has deployed capital across dozens of global deals in recent years, with significant allocations to Indian infrastructure, digital economy, and financial services. KIA holds stakes in Maruti Suzuki, CarTrade Tech, and Suntech Realty. QIA has invested in Swiggy, Rebel Foods, VerSe Innovation, and Flipkart.

For these funds, India offers a unique combination: one of the fastest-growing large economies, a regulatory framework that provides specific tax exemptions for sovereign investors under Section 10(23FE), and deep, liquid public markets. But capturing these benefits requires precise structuring across SEBI registration, FEMA compliance, tax treaty selection, and investment vehicle design.

Section 10(23FE): The Tax Exemption Framework

Overview and Extension to 2030

Section 10(23FE) of the Income Tax Act, 1961 — introduced through the Finance Act, 2020 — provides a 100% income tax exemption for specified sovereign wealth funds and pension funds on income from eligible investments in India. The Finance Act, 2025 extended the investment deadline by five years, from March 31, 2025 to March 31, 2030, effective from April 1, 2025.

The exemption covers three categories of income:

• Dividends: Fully exempt, regardless of the dividend distribution tax abolition in 2020
• Interest income: Exempt on interest from infrastructure debt and loans
• Long-term capital gains: Exempt on qualifying investments held for the prescribed minimum period

Eligibility Conditions

To qualify for the Section 10(23FE) exemption, a sovereign wealth fund must satisfy all of the following conditions:

1. Government ownership: The fund must be wholly owned and controlled, directly or indirectly, by the government of a foreign country
2. Regulatory compliance: The fund must be set up and regulated under the laws of the foreign country
3. No private benefit: Earnings of the fund must not be credited to any private person but only to the accounts of the foreign government or its designated accounts
4. No commercial activity: The fund must not undertake any commercial activity within or outside India
5. Government vesting: Assets of the fund must vest with the foreign government upon dissolution
6. Notification: The fund must be notified by the Central Government in the Official Gazette
7. No borrowing for investment: The source of investment in India must not be from any borrowings — a condition clarified by CBDT Circular No. 19 of 2021. If the fund or any of its group concerns has specifically borrowed to make an Indian investment, the exemption is unavailable

Eligible Investment Categories

The exemption applies to investments in:

• Infrastructure businesses: As defined in the Harmonised Master List — covering power, roads, ports, airports, railways, urban infrastructure, water supply, telecommunications, and logistics
• Category I and II Alternative Investment Funds (AIFs): With at least 50% investment in eligible infrastructure entities, specified companies, NBFCs, or InvITs
• Domestic companies: Set up after April 1, 2021, with minimum 75% investment in eligible infrastructure entities
• NBFCs: With minimum 90% lending to eligible infrastructure entities
• Infrastructure Investment Trusts (InvITs): Direct investment in listed or unlisted InvITs

Capital Gains Clarification (Finance Act 2025)

The Finance Act 2025 introduced an important clarification: the reclassification of gains from unlisted debentures under Section 50AA will not apply to investments made by SWFs and pension funds. This means long-term capital gains accruing to these entities from debenture investments will continue to remain tax-exempt, even if the gains would otherwise be reclassified as short-term income for regular taxpayers.

SEBI Registration: Category I FPI Status

Registration Framework

Sovereign wealth funds investing in Indian securities markets must register as Foreign Portfolio Investors (FPIs) with SEBI through a Designated Depository Participant (DDP). Under Regulation 5(a)(i) and (ii) of the FPI Regulations, SWFs and pension funds qualify as Category I FPIs — the most privileged classification, offering:

• Simplified KYC requirements compared to Category II FPIs
• Exemption from concentration limits for government securities and corporate bonds
• Priority processing of applications by DDPs

Investment Limits and Restrictions

FPI investment in Indian securities is governed by the NDI Rules (Schedule II) and SEBI's Master Circular for FPIs. Key limits include:

A critical compliance point: if an FPI's equity holding in any company exceeds 10% (individually or along with its investor group), it is reclassified as FDI under SEBI and RBI rules, triggering a completely different regulatory framework including pricing guidelines, reporting requirements, and potentially government approval under the government approval route.

Deal Structures Used by Middle East SWFs

1. Direct Equity Investment (FPI Route)

The most common structure for listed securities. The SWF registers as a Category I FPI, opens a custodian account, and invests directly through the stock exchange or via block deals. ADIA's anchor investment in the ICICI Prudential Asset Management IPO is a typical example.

Tax treatment: Listed equity held for more than 12 months attracts LTCG tax at 12.5% on gains exceeding INR 1.25 lakh per year (post-Finance Act 2024 amendment). However, if the investment qualifies under Section 10(23FE), this gain is fully exempt.

2. Private Equity / Venture Capital (AIF Route)

For unlisted investments, SWFs often invest through SEBI-registered Category I or II Alternative Investment Funds. QIA's investments in Swiggy, Rebel Foods, and VerSe Innovation were structured through this route. The AIF pools capital from multiple investors and deploys it into portfolio companies.

Tax treatment: Category I and II AIFs receive pass-through tax treatment — income is taxed in the hands of investors, not the fund. For an SWF investor eligible under Section 10(23FE), the pass-through income (dividends, interest, LTCG) is tax-exempt if the AIF has at least 50% allocation to eligible infrastructure entities or specified companies.

3. Direct Stake Acquisition (FDI Route)

For strategic investments exceeding 10% equity or in unlisted companies, SWFs use the automatic route or government approval route for FDI. This requires compliance with pricing guidelines (fair market value based on internationally accepted pricing methodology), reporting via FC-GPR within 30 days, and sector-specific conditions.

Tax treatment: Capital gains on unlisted shares held for more than 24 months are taxed as LTCG at 12.5%. For SWFs with Section 10(23FE) eligibility and investment in qualifying infrastructure, this gain is exempt.

4. Infrastructure Investment Trust (InvIT) Route

InvITs are a favoured vehicle for SWFs targeting Indian infrastructure. They provide steady yield (minimum 90% of cash flows must be distributed), listing liquidity, and asset-level transparency. ADIA and other Gulf funds have used InvITs to gain exposure to Indian roads, power transmission, and telecom tower assets.

Tax treatment: Interest and dividend distributions from an InvIT are taxable in the unitholder's hands at the rate applicable to that investor — the domestic withholding rate, or a lower treaty rate where the investor qualifies for one. Under Section 10(23FE), these distributions become fully exempt for eligible SWFs.

5. Joint Venture / Co-Investment Platforms

Increasingly, Middle East SWFs establish co-investment platforms with Indian conglomerates — creating dedicated vehicles for sector-specific deployment. Mubadala's partnerships in India span digital, telecommunications, renewable energy, infrastructure, financial services, healthcare, and retail.

These platforms are typically structured as:

• A Mauritius or Singapore holding company (for tax treaty optimisation)
• An India-domiciled AIF or NBFC as the investment vehicle
• A management company jointly controlled by the SWF and the Indian partner

DTAA Benefits: UAE, Saudi Arabia, and Kuwait

India-UAE DTAA

The India-UAE DTAA, signed on 29 April 1992 (in force from 1993) and amended subsequently, has undergone significant changes. The protocol amendments have modified the capital gains provisions. Under the current treaty:

Important: The India-UAE DTAA was amended by the 2007 protocol to withdraw the residence-based capital gains exemption that previously existed for UAE investors generally. However, Article 24 (Income of Government and Institutions) exempts the UAE Government — expressly including the Central Bank of the UAE, the Abu Dhabi Investment Authority (ADIA) and the Abu Dhabi Fund for Economic Development — from Indian tax on income derived from India, including capital gains. UAE funds not named in or agreed under Article 24 (such as Mubadala and ADQ) must rely on Section 10(23FE) for capital gains exemption on qualifying infrastructure investments.

India-Kuwait DTAA

Under the India-Kuwait DTAA (signed June 15, 2006, effective April 1, 2008), capital gains arising from the sale of shares of a company in one contracting state are taxable in that state. This means India retains the right to tax capital gains on Indian shares held by Kuwaiti investors, including KIA. The withholding tax rates under the treaty are:

• Dividends: 10%
• Interest: 10%
• Royalties/FTS: 10%

India-Saudi Arabia DTAA

The India-Saudi Arabia DTAA provides for withholding tax rates of 5% on dividends (a flat rate for the beneficial owner, with no shareholding threshold — one of the lowest in India's treaty network), 10% on interest ("income from debt-claims"), and 10% on royalties. The treaty has no fees-for-technical-services article. Capital gains on shares are taxable in the source country (India).

Interplay Between DTAA and Section 10(23FE)

The most effective tax structure for Middle East SWFs investing in India combines both frameworks:

1. Section 10(23FE) provides the broadest exemption — covering dividends, interest, and LTCG from qualifying infrastructure investments, regardless of the DTAA position
2. DTAA withholding rates apply to non-infrastructure investments or investments that do not qualify under Section 10(23FE) — providing reduced rates compared to domestic law
3. For non-qualifying investments, the SWF should apply the DTAA rate or the domestic rate, whichever is lower, by filing Forms 145 and 146 (formerly Forms 15CA and 15CB) and providing a Tax Residency Certificate (TRC)

Regulatory Compliance for SWF Investments

FEMA and RBI Reporting

All SWF investments in India must comply with FEMA regulations:

• FPI investments: Reported through the custodian bank to SEBI and RBI on a daily/weekly basis
• FDI investments: Reported via FC-GPR (within 30 days of share allotment), FC-TRS (within 60 days of transfer), and annual FLA Return (by July 15)
• Downstream investment: If the Indian entity makes further investments using SWF capital, downstream investment regulations apply, requiring compliance with sectoral caps and pricing guidelines

Competition Commission of India (CCI)

Acquisitions meeting the jurisdictional asset or turnover thresholds require prior CCI approval, unless the small-target (de minimis) exemption applies — it covers targets with assets in India of up to INR 450 crore or turnover in India of up to INR 1,250 crore. Given the scale of SWF transactions, most strategic deals require CCI clearance. Under the Competition (Amendment) Act, 2023 framework, the CCI must form its prima facie opinion within 30 days, and the overall review is subject to an outer limit of 150 days.

For a detailed walkthrough of the CCI approval process, see our guide on CCI approval for foreign acquisitions in India.

SEBI Takeover Code

If an SWF's aggregate shareholding (including shares held by entities acting in concert) in a listed company crosses 25%, a mandatory open offer obligation is triggered under SEBI's Substantial Acquisition of Shares and Takeovers Regulations, 2011. The open offer must be made to acquire at least 26% of additional shares at a price determined by SEBI's pricing formula. This is a significant consideration for SWFs building strategic positions in listed Indian companies.

Structuring Considerations for Maximum Tax Efficiency

Investment Through Wholly Owned Subsidiaries

Section 10(23FE) extends the exemption to wholly owned subsidiaries of notified SWFs. This means an SWF can create a dedicated India investment subsidiary — domiciled in its home jurisdiction or in a treaty-favourable jurisdiction — and route investments through it while retaining tax exemption eligibility.

ADIA, for example, operates through multiple investment subsidiaries that are separately notified under Section 10(23FE). This structure provides:

• Ring-fencing of Indian investment risk
• Separate regulatory identity for SEBI FPI registration
• Flexibility to create sector-specific or strategy-specific vehicles

Minimum Holding Period

Section 10(23FE) exemption for long-term capital gains requires the investment to be held for a minimum of three years. This is longer than the standard 12-month holding period for listed equity LTCG or the 24-month period for unlisted shares. SWFs must therefore commit to a minimum 3-year holding horizon for infrastructure investments to maintain tax exemption.

Avoiding the Borrowing Trap

CBDT Circular No. 19 of 2021 clarified that if the source of the India investment is from borrowings — whether by the SWF itself or by any of its group concerns specifically for the purpose of making the Indian investment — the Section 10(23FE) exemption is unavailable. SWFs must therefore ensure that India investments are funded from the general corpus or sovereign reserves, not from dedicated borrowing facilities. This requires careful treasury structuring and documentation at the fund level.

Recent Deal Examples and Trends

Notable 2024-2025 Transactions

Emerging Trends for 2026

• Renewable energy: Indian solar and wind projects increasingly attract SWF capital through InvIT structures, combining yield with Section 10(23FE) exemption
• Digital infrastructure: Data centres, fibre networks, and telecom towers qualify as infrastructure under the Harmonised Master List, making them eligible for tax-exempt SWF investment
• Co-investment with Indian conglomerates: Structured platforms that combine SWF capital with Indian operational expertise, particularly in logistics, warehousing, and urban infrastructure
• GIFT City as investment hub: SWFs are exploring GIFT City for fund administration, with the added benefit of IFSC-specific tax exemptions on fund management income

For companies seeking SWF investment or structuring joint ventures with sovereign funds, our FDI advisory services provide end-to-end transaction support. For FEMA compliance on large cross-border transactions, see our FEMA-RBI compliance services.

Key Takeaways

• Section 10(23FE) provides 100% tax exemption on dividends, interest, and LTCG for notified SWFs — extended to investments made through March 31, 2030, covering infrastructure businesses, qualifying AIFs, InvITs, and specified domestic companies
• The borrowing restriction is the most critical compliance trap — if the SWF or its group concerns borrows specifically to fund the Indian investment, the entire exemption is lost under CBDT Circular No. 19 of 2021
• DTAA benefits provide a secondary layer of tax efficiency — withholding rates of 5-12.5% on dividends and interest under India's treaties with the UAE, Saudi Arabia, and Kuwait apply to non-qualifying investments
• Category I FPI status gives SWFs privileged market access — simplified KYC, relaxed concentration limits, and priority processing, with the 10% single-company equity threshold as the key boundary between FPI and FDI treatment
• Minimum 3-year holding period applies for LTCG exemption — longer than the standard 12 or 24-month periods, requiring SWFs to commit to medium-term horizons on infrastructure investments