The finance ministry has clarified that investors of futures and options would not get exemption of withdrawal of enhanced surcharge.
In a press release, the ministry said, “The derivatives (future & options) are not treated as capital assets and the income arising from the transfer of the derivatives is treated as business income and liable for normal rate of tax.”
However, FPIs investing in futures and options would get exemption from enhanced surcharge even if they invest in futures and options. “In the case of FPIs, the derivatives are treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and subjected to a special rate of tax as per the provisions of section 115AD of the Act. Therefore, it is also decided that the tax payable on gains arising from the transfer of derivatives by FPI which are liable to special rate of tax under section 115AD of the Act shall also be exempted from the levy of the enhanced surcharge.”
Since gains arising out of category I and category II are capital gains, investors in these categories will continue to get benefits of lower tax rates due to withdrawal of enhanced surcharge. Simply put, there is status quo in these two categories in terms of taxation.
Now the question is if investors of category III AIFs would get benefits of lower tax rates.
Currently, there are 117 funds under Category III AIFs. Of these, 95 funds are long only funds. Since long only funds deal with cash markets, investors in long only funds will be eligible for lower tax rates.
Similarly, 12 funds in the industry follow long short strategy i.e. combination of both cash and derivatives. Hence, investors in these funds will get partial benefits i.e. benefits only to the extent of equity exposure through cash markets.
Finally, 10 funds, which are purely hedge funds, will not get any benefits as these funds deal with derivatives.
Overall, over 95% of category III AIFs will benefit from the latest move.
While large number of investors in AIFs will get benefits of lower tax rates of 11.96% and 17.94%, a fraction of investors will still have to pay higher tax rates of 14.25% and 21.37% due to enhanced surcharge.