New Delhi: Finance minister Nirmala Sitharaman on Friday announced the government’s decision to scrap the increase in surcharge on the income tax outgo for both domestic as well as foreign investors that came into effect as part of the second full year budget of 2019.

“In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (no. 2) Act, 2019 on long and short term capital gains arising from transfer of equity shares/units referred in section 111A and 112A respectively," Finance Minister Sitharaman told reporters at a briefing on measures for boosting economic growth. Sitharaman said that the surcharge increase is removed for both domestic and foreign investors and that the pre-budget position is restored.

The move is a big relief for investors, including foreign portfolio investors. Sitharaman also said that startups registered with the commerce ministry will be totally exempt from an anti-evasion provision in the Income Tax Act for taxation of share premium known as the ‘angel tax’. "Section 56 (2)(viib) of the Income Tax Act shall not to apply to startups registered with the commerce ministry," Sitharaman said.


FPIs which are incorporated as trusts were affected by an unintended effect of the increase in surcharge that the government introduced to raise tax revenue in the full budget for FY20 announced in July. The surcharge increase was on the income tax outgo of individuals with earnings more than 2 crore, in two slabs.

FPIs set up as trusts have been saying that they may be assessable by tax officials as associations of persons and are therefore affected by the surcharge increase. Sitharaman had met representatives of the financial sector including FPIs earlier this month to listen to their grievance.

The surcharge was raised from 15% to 25% where the income is between 2-5 crore and from 15% to 37% for those earning more. In effect, a person earning in the range of 2-5 crore will pay 39% tax (called the highest marginal tax rate for that person) on the income exceeding 2 crore, and a person earning more than 5 crore will pay 42.74% on the income exceeding 5 crore.

Indian markets are down about 10% from their June highs after Sitharaman announced higher surcharge on FPIs, who have sold Indian stocks (net) worth over $3 billion over last two months.

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