Derivatives relief for FPIs
It has been decided that tax payable on gains arising from the transfer of derivatives by FPIs shall be exempted from the enhanced surcharge
- Published 25.08.19, 1:00 AM
- Updated 25.08.19, 1:00 AM
- 2 mins read
Foreign portfolio investors (FPI) will not have to pay the higher surcharge on gains arising from the transfer of derivatives — futures and options (F&O). However, this benefit will not be available to domestic investors.
The finance ministry had on Friday announced a slew of measures to boost the economy, including a rollback of the enhanced super-rich tax on foreign equity investors announced in the budget.
The derivatives (futures and options) are not treated as capital asset and the income arising from the transfer of derivatives is treated as business income and liable for a normal rate of tax for domestic investors, the Central Board of Direct Taxes (CBDT) said in a statement.
But in the case of foreign portfolio investors (FPIs), derivatives are treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and are subject to a special rate of tax, according to the provisions of the Income Tax Act.
“Therefore, it has been decided that the tax payable on gains arising from the transfer of derivatives (futures and options) by FPIs, which are liable to a special rate of tax under section 115AD of the (Income Tax) Act, shall also be exempted from the levy of the enhanced surcharge,” it said.
However, the tax payable on business income arising from the transfer of derivatives to a person other than an FPI shall be liable for the enhanced surcharge, it added.
This means that such a gain will be business income for domestic investors and taxed at the normal rate of income tax plus the enhanced rate of surcharge, if it is more than Rs 2 crore.
“This was the position before the presentation of the budget, which has been restored. The finance minister had not explicitly spelt out about the derivatives on Friday. Mentioning just equities had caused some confusion and the CBDT has come out with a clarification to dispel any ambiguity,” Sunil Gidwani of Nangia Advisors, a tax consultancy firm associated with Anderson Global, said.
In the 2019-20 Union budget, the government had increased the surcharge to 25 per cent from 15 per cent on taxable income between Rs 2 crore and Rs 5 crore, and to 37 per cent from 15 per cent for income above Rs 5 crore.
Following the increase in surcharge, the effective income tax rate for individuals with a taxable income of Rs 2-5 crore has gone up to 39 per cent from 35.88 per cent and for those above Rs 5 crore to 42.7 per cent.
Bringing non-corporate FPIs under the provision of the enhanced surcharge impacted the sentiments in the stock market.
It resulted in a massive outflow by FPIs from the Indian equity market, taking out nearly Rs 25,000 crore during July and August.