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CBDT Exempts Foreign Portfolio Investors (FPI) from Surcharge on Income from Derivatives

Income from Derivatives

The Central Board of Direct Taxes (CBDT) in their latest notification issued new guidelines for foreign portfolio investors. The foreign portfolio investors are exempted from paying an enhanced surcharge on gains from the transfers of derivates. The derivatives are better known as Future & Options (F&O). However, domestic investors will not get this exemption.

The exemption came with a much-needed explanation about the income from derivatives for the FPI[1]. Earlier, the revenue from the transfer of derivatives was treated as income from the business. Hence, it was liable for tax payment under the normal rate of tax.

In recent clarification, the Finance Ministry categorized income from derivatives as of the nature of capital gains. Hence, they are liable to pay tax under the provisions of section 115AD. This makes them fall under the exemption tax provisions for FPI.

“It is also decided that the tax payable on gains arising from the transfer of derivatives (F&O) by FPIs, which are liable to the special rate of tax under section 115AD, shall also be exempted from the levy of the enhanced surcharge,” the ministry said.

Also, Read: Read CBDT Clarifications for ITR Filing of AY 2019-2020.

The Backdrop

It is essential to inform that this clarification came as a result of the earlier made announcements made by the finance minister about surcharge exemption to FPI.

The minister in its press conference made a declaration about the withdrawal of surcharge levied on income from capital gains for FPI. However, whether income from derivatives fall under this scope or not was unclear to the stakeholder as there was no mention of income from derivatives or section 115AD.

As for now the income from short term and long term capital gains are exempted from surcharge levied on the name the “Super Rich” tax. The provision is slowed for both domestic investors and the FPI.

The exemption of surcharge under 115AD is solely for the FPI. Domestic investors will not get benefits from the tax exemption.

the tax payable at the normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge”, the ministry mentioned.

This concludes that the income from derivates is taxable for in-FPI under the applicable rate of income tax along with surcharge when it crosses the limit of Rs 2 crores.


Akash Dubey

Akash Dubey is a Law Graduate and works as an Advisor at Enterslice. He is proficient in Legal and Financial Advisory. His expertise in the skills of Legal and Financial Research is an aid to his strengths as an Advisor.

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