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ITAT: STCG on Index-Based Derivatives Not Taxable in India under India–Mauritius DTAA May 2, 2026
Published in: Alerts
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The ITAT, in EM Delta One, has held that short-term capital gains earned by a Mauritius-based FPI from trading in index-based derivatives are not taxable in India under Article 13(4) of the India–Mauritius DTAA.
Rejecting the tax department’s attempt to tax such gains as share-related income under Article 13(3A), the Tribunal clarified that derivatives and shares are distinct asset classes under the Securities Contracts (Regulation) Act, 1956 and the Income-tax Act, 1961. The mere fact that derivatives derive value from underlying shares or indices does not alter their legal character.
Relying on its earlier ruling in Estee India Fund, the ITAT reiterated that gains from derivative transactions are taxable only in the country of residence of the investor and cannot be recharacterised as gains from shares for treaty purposes.
The ruling offers important clarity for foreign investors resident in jurisdictions with similar DTAA provisions, including Singapore, UAE, Saudi Arabia, and others, while noting that treaties such as those with the UK, USA, and Canada follow a different approach to capital gains taxation.
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