Finally, there is a lot more clarity on the subject of derivatives tax. There were concerns that the higher surcharge imposed in the budget on super rich category, would also hit the FPIs structured as trusts or as AOPs. The government had clarified that the capital gains earned by all investors would be exempt from the higher surcharge but there was lack of clarity on the surcharge applicable on F&O income and bond profits earned by FPIs. Now, that has also been clarified by the FM. All capital gains earned by the FPIs from equities, bonds and futures & options will be exempt from the additional surcharge. That is because, in the case of FPIs, all gains on equity, debt and derivatives are treated as capital gains only. However, existing rates of tax and surcharge will continue for FPIs.

However, this clarification has put Indian domestic investors at a disadvantage. Here is why. While exemption from higher surcharge is clear for FPIs, Indian investors of reasonable size, are required to show income from trading in securities as Business Income and not as capital gains. Tax returns are filed under capital gains for a small investor or trader but in the case of the super rich investors they will still have to pay additional surcharge since they show these gains as business income. While, there is a choice for local investors in case of equity gains, in the case of futures and options, they have to mandatorily show it as business income only. That would mean; gains on F&O will attract higher surcharge as will gains on bonds. This is a disadvantage to domestic investors.