India's Tax Reform and Its Impact on Derivative Arbitrage Instruments

The Indian arbitrage fund industry faces a serious challenge following the updated tax policy on derivatives financial instruments. The established market, valued at around $36 billion, is preparing for a significant reshaping of investor income. The decision, announced during a parliamentary session on a weekend, aims to limit speculative activity but will also impact less risky strategies, unexpectedly affecting the entire segment.

Mechanics of Tax Impact on Spot-Futures Operations

The tax rate, initially targeted at high-risk speculation in the options market, directly affects arbitrage operations. The problem is that increasing the tax burden raises the cost of each transaction when executing classic spot-futures arbitrage strategies. This mechanism functions similarly to a derivative of a complexity function: the higher the tax rates, the faster potential profits shrink.

According to data from the financial platform Jin10, current arbitrage spreads are already characterized by a narrow range—typically just 0.6-0.8% on a monthly basis. Additional transaction costs caused by the tax reform create a situation where a significant portion of these potential earnings simply disappears.

Calculations by Professional Managers

Investment fund managers are actively recalculating their financial models, aware of the scale of changes. Wealthy.in, an asset management platform, through its co-founder Aditya Agarwal, provided a detailed analysis of the situation. The expert emphasized that with the current structure of arbitrage opportunities, even a slight increase in costs transforms the entire derivative profitability of investment positions.

The industry recognizes that strategies which seemed attractive in volatile markets will lose much of their appeal. Investors are beginning to reassess the risk-reward ratio, shifting toward alternative instruments.

Long-term Market Implications

India’s tax policy will not just adjust current income—it will reshape the architecture of the entire derivatives segment. Funds anticipate a decline in activity, capital inflows into less costly structures, and a possible wave of consolidation among management companies. The arbitrage market, long a stable source of income, is undergoing a transformation that will shape its development in the coming years.