Villagers, politicians and others bade farewell to Singh, whose body was returned to Bikhiwind Thursday 23 years after he crossed the border into Pakistan, the Press Trust of India reported.
Punjab Police fired shots into the air to show their respect for Singh, 49, who died Thursday in a hospital in Lahore, Pakistan.
Punjab Chief Minister Parkash Singh Badal and Union Minister of State for External Affairs Preneet Kaur were among those attending the funeral. Badal had announced there would be a state funeral and three days of mourning in addition to financial assistance for Singh's family and government jobs for his daughters.
Businesses in the area were closed Friday. Witnesses said some demonstrators chanted anti-Pakistan slogans and burned effigies.
Singh was arrested in 1990 as Manjit Singh by the Pakistan army, accused of being an Indian spy and charged with plotting several bombings in 1989 at Lahore and Multan.
His family said Singh inadvertently crossed the border while he was drunk, which he asserted at trial.
Badal has called for an independent investigation into the circumstances leading to Singh's death, PTI said. He was attacked by several inmates last week at the prison.