A Canadian pension fund in Indian infrastructure: the income-tax exemption, and the treaty rates where it does not apply

Schedule V of the Income-tax Act, 2025 (Table, Sl. No. 7) leaves out of total income the dividend, interest and long-term capital gains that a notified foreign pension fund or sovereign wealth fund earns on investment in specified Indian infrastructure vehicles, if the investment is made on or after 1 April 2020 and on or before 31 March 2030 and held for at least three years. The fund must be named in a Central Government notification. No Canadian fund is named in the Act; a notification decides it. Where the exemption does not apply, Articles 10 and 11 of the India-Canada tax agreement leave India's tax on dividends at the domestic 20 per cent under section 207, because the treaty ceiling of 25 per cent is higher, cut to 15 per cent for a company holding at least 10 per cent of the votes, and cap tax on interest at 15 per cent. India and Canada have no investment treaty in force, on the Department of Economic Affairs list.

What does the Income-tax Act, 2025 exempt?

The Income-tax Act, 2025 (Act 30 of 2025) received assent on 21 August 2025 and, by section 1(3), came into force on 1 April 2026. Section 11 introduces Schedule V, which lists income that is not included in the total income of certain eligible persons. Serial number 7 of its table is the counterpart of the exemption that section 10(23FE) of the Income-tax Act, 1961 gave to such funds.

The income covered is dividend, interest, a category of sums referred to in section 92(2)(k) (a specified sum a unit holder receives from a business trust), and long-term capital gains, whether or not those gains are deemed short-term under section 76. It must arise from an investment made in India by a "specified person", in the form of debt, share capital or units. The eligible person is that specified person, and the stated conditions are the next question.

Who is a specified person, and how does a Canadian fund become one?

Note 5(a) of Schedule V defines the specified persons. For a Canadian pension fund the relevant limb is the pension fund limb. It requires a fund that:

• is created or established under the law of a foreign country, including the law of a province, state or local body;
• is not liable to tax there, or, if liable, has all its income exempted by that country;
• does not take part in the day-to-day operations of the investee, though a monitoring mechanism, including the right to appoint directors, is not counted as such participation;
• is specified by the Central Government by notification for this purpose, and meets the conditions in that notification; and
• satisfies such other conditions as may be prescribed.

A sovereign wealth fund has a parallel limb: it must be wholly owned and controlled by a foreign government, set up and regulated under that country's law, with earnings credited to the government and assets vesting in it on dissolution, and it too must be specified by notification. No Canadian fund is named in the Act.

Which investments qualify, and until when?

Column D of serial number 7 sets the conditions on the investment. It must be made on or after 1 April 2020 but on or before 31 March 2030, and held for at least three years. It must be in one of five kinds of vehicle:

• a business trust that is an eligible infrastructure investment trust (Infrastructure Investment Trust, referred to in section 2(21)(a));
• an eligible infrastructure entity, meaning a company or enterprise that develops, or operates and maintains, an infrastructure facility as defined in section 138, or carries on another business the Central Government specifies;
• an eligible Alternative Investment Fund, being a Category I or Category II fund under the Securities and Exchange Board of India's 2012 regulations with at least 50 per cent of its investment in eligible entities, computed as prescribed;
• an eligible domestic company, set up and registered on or after 1 April 2021 with at least 75 per cent of its investments in eligible infrastructure entities; or
• an eligible Non-Banking Financial Company, which is an infrastructure finance company or infrastructure debt fund with at least 90 per cent of its lending to eligible infrastructure entities.

What conditions can take the exemption away?

Column D carries further conditions. Where the investee holds less than the stated share in eligible entities, the exempt income is computed proportionately, in the prescribed manner. Where income has been left out of total income and, in a later tax year, the specified person fails a condition, that income becomes chargeable as the specified person's income of that later year. The Board may issue guidelines on difficulties, with the Central Government's previous approval, and the guidelines are laid before Parliament and bind both the tax authority and the specified person.

One condition is categorical. If a sovereign wealth fund or pension fund has loans or borrowings, directly or indirectly, for the purpose of investing in India, it is deemed not eligible for the exclusion. Note 5(c) defines the term. For a pension fund it covers any loan taken, or any deposit or investment made in the fund by any person, but not deposits or investments that represent statutory obligations and defined contributions of retirement, social security, employment, disability or death-benefit plans, or similar compensation to participants or beneficiaries.

Is any Canadian fund on the notified list?

We have not read a notification naming a Canadian fund. The Income-tax Department's website returned an access-denied response to our requests, and a search of the Gazette site did not surface a notification we could open. A notification is addressed to a named entity and carries its own conditions, so whether a given entity stands notified is a fact to be checked against the current list.

What does the India-Canada tax agreement cap where the exemption does not apply?

The agreement between Canada and India for the avoidance of double taxation is dated 11 January 1996 (Canada Treaty Series 1997 No. 16, published by the Government of Canada).

Article 10 lets India tax a dividend paid by an Indian company to a Canadian resident, but where that resident is the beneficial owner, the tax shall not exceed:

• 15 per cent of the gross dividend, if the beneficial owner is a company that controls, directly or indirectly, at least 10 per cent of the voting power in the paying company; and
• 25 per cent of the gross dividend in all other cases.

Article 11 caps tax on interest arising in India and paid to the beneficial owner resident in Canada at 15 per cent of the gross amount. Paragraph 3 exempts interest in three cases: the payer is the Government of the source State or a political subdivision or local authority; the beneficial owner is the other State's central bank; or the payee is an agency or instrumentality, including a financial institution, agreed in letters exchanged between the competent authorities. Interest on a loan made, guaranteed or insured by the Export Development Corporation is taxable only in Canada.

Both articles fall away if the holding or debt-claim is effectively connected with a permanent establishment in the source State. Article 13 sets no cap on capital gains: gains from the alienation of property other than ships and aircraft may be taxed in both States.

What does the arithmetic look like?

The figures below are illustrative and hypothetical, not any actual fund or transaction.

Take a Canadian pension fund that is the beneficial owner of INR 100 crore of dividend from an Indian infrastructure company, with a holding below 10 per cent of the voting power. If the investment falls within Schedule V, Table Sl. No. 7, the dividend is not included in total income. If it does not, for example because the investment was made after 31 March 2030, India's tax is the domestic 20 per cent under section 207, INR 20 crore, because the treaty ceiling of 25 per cent is higher. Had the holding been a company-to-company holding of at least 10 per cent, the treaty cap of 15 per cent, INR 15 crore, would govern. Interest of INR 100 crore on a loan to the same company would be capped at INR 15 crore under Article 11, unless an exemption in paragraph 3 applies.

A second illustration concerns the three-year hold. A fund buys units on 1 December 2029, before the cut-off, so the date test is met. If it sells on 30 June 2032, the units were held for under three years and the condition in column D is not met, so Schedule V does not apply to that sale, and under Article 13 India may tax the gain.

Is there an investment treaty between India and Canada?

On the Department of Economic Affairs page headed Bilateral Investment Promotion and Protection Agreement, which we read on 28 October 2026 across all ten pages of the list, Canada does not appear. We therefore state that no investment treaty between India and Canada is in force on that list; we did not search for a pending negotiation. The tax agreement protects against double tax, not against expropriation or unfair treatment, and gives an investor no treaty claim.

What remains unsettled?

Four matters. First, whether the Finance Act, 2026 amended Table Sl. No. 7; this note reads the Act as enacted on 21 August 2025. Second, which Canadian entities are currently notified, and on what conditions and dates; we have read no notification. Third, the prescribed manner of computing proportionate exemption and the other conditions the rules prescribe for pension funds, which we have not read. Fourth, whether the agreement has been modified since 1996 by instruments we did not find on the Canadian treaty page, including whether the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting modifies the agreement. The rates above are those in the 1996 text as read.