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Sovereign wealth funds – Section 10(23FE)

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Sovereign wealth funds Section 1023FE

A sovereign wealth fund is a type of investment fund in which the national government owns the majority of the stock. These funds invest in financial products such as bonds, equities, gold, and real estate. Like any investment fund, sovereign wealth funds (SWFs) have their own goals & objectives, risk tolerances, terms, liability matches, and liquidity problems. Returns may be more critical to some funds than liquidity, and vice versa. Risk management in sovereign wealth funds can range from very conservative to a high tolerance for risk, depending on the assets and objectives. 

Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961

  1. As part of the Finance Act, 2020, section 10 of the Income-tax Act, 1961 was amended to include clause (23FE) to exempt sovereign wealth funds and pension funds (from now on referred to as “specified funds”) from taxes arising on interest, dividends, and long-term capital gains (LTCGs) related to infrastructure investments made in India from April 1, 2020, to March 31, 2024.
  2. The Finance Act, 2021 inserted the seventh proviso to clause (23FE) of section 10 of the Act, stating that if a specified fund has loans or borrowings, either directly or indirectly, for the grounds of investing in India, such fund is not eligible for exemption under this provision.
  3. Concerns have been raised regarding the term indirectly used in the proviso above of clause (23FE) of section 10 of the Act, which has not been defined. No clarity has been provided under the existing provisions. Additionally, there has been speculation that if the specified fund, its holding company, any other holding company, or any of its associate companies (here in after referred to as “group concern”) have any borrowings or loans, the specified fund may not qualify for the exemption.
  4. The first proviso of clause (23FE) of section 10 of the Act states that if any difficulty arises in interpreting or implementing the provisions of this clause, the Board may issue guidelines to resolve the difficulty, with the approval of the Central Government. Accordingly, by exercising the powers conferred by this proviso, the Board issues the following guidelines with the approval of the Central Government.

Guidelines of section 10 of the Income-tax Act, 1961
To clarify the issues raised in paragraph 3 of this document, it is clarified that the following individuals are eligible for exemptions under clause (23FE) of Section 10 of the Act: –

  1. Clause (23FE) of section 10 of the Act does not exempt from taxation any specified fund or any of its group concerns if the loan or borrowing was exclusively to acquire an investment in India by the specified fund; and
  2. In cases where loans and borrowings were taken by the specified fund or any of its group concerns for any reason other than to invest in India, the investment in India shall not be presumed to have been made with the borrowed funds. The specified fund shall be entitled to exemptions under clause 23(FE) of section 10 of the Act. All other requirements under the said clause must be met, provided the loans and borrowings were not specifically intended for investment purposes in India.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory, TDS matters other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Income Tax on Fixed Deposit’s Interest Income, kindly contact us.

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