Recalibrating the tax framework for sovereign wealth funds

With right incentives, they could be cornerstones of Indian growth

- MUKESH BUTANI & SEEMA KEJRIWAL

In 2025, inflows from state-owned funds (sovereign wealth funds, or SWFs) to India dropped by 72 percent 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.