Short-Term Capital Gains on Index-Based Derivatives Exempt under Article 13(4) of the India-Mauritius DTAA as Derivate are Distinct from Shares

The Hon’ble Delhi ITAT adjudicated the appeal of EM Delta One [IT(IT)A No.84/Del/2025)/ Em Delta one vs. ACIT, International Taxation [2026] 185 taxmann.com 868 (Delhi – Trib.)[22-04-2026]], a Mauritius-incorporated entity registered as a Foreign Portfolio Investor (FPI) with SEBI, which had earned STCG by trading in index-based derivatives on Indian stock exchanges. The assessee claimed the said STCG as exempt under Article 13(4) of the DTAA, which provides that gains from the alienation of any property other than those specifically covered in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident. The Assessing Officer brought the STCG to tax under Article 13(3A) of the India Mauritius Tax treaty, which permits India to tax gains from the alienation of shares acquired on or after 1 April 2017 in a company resident in a Contracting State.

The core issue before the Tribunal was whether index-based derivatives could be treated as “shares” within the meaning of Article 13(3A) of the DTAA. The Revenue’s position, as endorsed by the DRP, was grounded in a purposive interpretation of the DTAA, arguing that since the value of a derivative is derived from underlying shares or a stock index, gains from its alienation should be treated similarly to gains from the alienation of the underlying shares. The DRP further relied on the treaty’s objective of preventing fiscal evasion and cautioned against using a literal domestic-form test that ignores the economic reality of modern financial instruments.

The Tribunal, however, decisively rejected this approach and held that “shares” as envisaged in Article 13(3A) of the DTAA are entirely distinct from index-based derivatives. Derivatives are contractual instruments whose value is derived from underlying assets but which do not confer any ownership or proprietary rights in those assets. Reading the definitions contained in the Securities Contract (Regulation) Act, 1956 (SCRA) in conjunction with Section 43(5)(b) and (d) of the Income Tax Act, the Tribunal observed that “derivatives are a distinct asset class as compared to equity shares”. Significant reliance was placed on the coordinate bench ruling in M/s Estee India Fund [ITA 1955/Del/2025], which had categorically held that trading in stock derivatives and trading in shares is not one and the same, and that gains from derivatives, even where the underlying asset may be shares, cannot be treated as gains from trading in shares. The Tribunal also drew support from Vanguard Emerging Markets Stock Index Fund [172 taxmann.com 515 (Mum.)], reinforcing that different financial instruments constitute separate asset classes for treaty purposes.

Accordingly, the Tribunal concluded that the sale of index-based derivatives by the assessee was covered under the residuary Article 13(4) of the DTAA and not under Article 13(3A) and thus the STCG from such derivatives was taxable only in Mauritius.

Conclusion:

The ruling provides important clarity for Foreign Portfolio Investors and other non-resident entities operating in Indian financial markets. By unequivocally distinguishing derivatives from shares for the purposes of the India-Mauritius DTAA, the Tribunal has reinforced that treaty provisions must be interpreted based on the specific nature of the financial instrument being alienated.