Income Tax Paid Cannot Offset SEBI Disgorgement– What the 2026 Ruling Means for Investors

The Securities Appellate Tribunal (SAT) has clarified an important principle for India’s capital markets: income tax paid on alleged unlawful gains cannot be adjusted against disgorgement ordered by the Securities and Exchange Board of India (SEBI).

The ruling delivered on May 8, 2026, reinforces the distinction between tax liability and securities law enforcement. For businesses, market intermediaries, and foreign investors operating in India, the decision signals continued regulatory scrutiny over fraudulent trading practices and a stricter approach toward recovery of unlawful gains.

Background and origin of the proceedings

The proceedings originated from an investigation conducted by the SEBI into alleged fraudulent trading activities linked to stock recommendations broadcast on a television program hosted by market commentator Pradeep Pandya.

SEBI examined trading activity undertaken between November 1, 2019, and October 4, 2021, focusing on whether Alpesh Furiya and related entities had coordinated trades with the television commentator prior to the public dissemination of stock recommendations.

According to the tribunal’s findings, WhatsApp communications and trading records indicated that Furiya had contacted Pandya before purchasing shares in multiple companies. The shares were allegedly acquired shortly before recommendations were aired on television and subsequently sold following market movement triggered by those recommendations.

SAT observed that the sequence of communications, purchase timings, recommendations, and sales established a clear nexus between the traders and the television commentator. Based on these findings, SEBI alleged violations under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

SEBI’s disgorgement order

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Subsequently, SEBI issued a disgorgement order on June 11, 2024, directing recovery of the alleged wrongful gains. The matter thereafter proceeded before the tribunal through appellate proceedings (Appeal Lodging no. 0411/2024). SAT issued its order on January 29, 2026, following which the applicants filed a review application seeking reconsideration of the decision.

The applicants sought review of the order on three principal grounds:

1. Calculation of disgorgement
2. Denial of adjustment for income tax already paid on the trading gains
3. Imposition of litigation costs amounting to INR 2.5 million (US$26,089.6).

While SAT granted partial relief by waiving the litigation costs, it rejected the substantive arguments relating to tax adjustment and disgorgement computation.

Calculation of disgorgement

In this case, SEBI computed disgorgement on a “net gain” basis, treating the entire profit arising from the impugned trades as wrongful gain under the PFUTP Regulations. The applicants argued that disgorgement should be restricted to gains attributable only to post-recommendation price movement.

SAT’s position on tax adjustment

A key issue before the SAT was whether the applicants could reduce the disgorgement amount payable to the SEBI by the income tax already paid on the disputed trading profits.

The applicants argued that they had already discharged tax liability on the gains arising from the impugned trades. Therefore, SEBI should account for those tax payments while determining the final disgorgement amount.

SAT rejected this contention and clarified that securities law enforcement and income tax treatment operate under separate legal frameworks. The tribunal held that any claim relating to tax adjustment, refund, or relief must be pursued independently under India’s Income-tax Act.

The tribunal stated:

“In our view, it is appropriate for the applicants to seek remedy under the Income Tax Act, 1961.”

Reinforcement of SEBI’s enforcement powers

SAT held that payment of income tax does not alter the character of the gains as “wrongful gains” under SEBI regulations. The tribunal held that once fraudulent conduct between the parties had been established, the entirety of the gains derived from such trades constituted unlawful gain liable for disgorgement.

The decision is likely to influence future enforcement actions involving insider trading, misleading investment recommendations, pump-and-dump schemes, and fraudulent securities transactions.

Increased compliance exposure for businesses

For listed companies, securities brokers, research analysts, and financial intermediaries, the ruling highlights the importance of robust compliance and transaction monitoring mechanisms.

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Businesses operating in India’s securities markets may face parallel exposure under the following:

1. Securities regulations administered by SEBI; and
2. Tax laws administered separately by income tax authorities.

Even where taxes have already been paid on disputed income, companies may still be required to disgorge the entire alleged gain and subsequently pursue separate tax remedies.

India’s Income-tax Act, 2025, on securities and capital gains

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Section 210 of the Income-tax Act, 2025, establishes a special tax framework for Foreign Institutional Investors (FIIs) and specified investment funds earning income from securities or capital gains in India. The provision prescribes different tax rates depending on the nature of the income and limits the deductions available under the regime.

Tax on regular income from securities

The Act taxes income earned from securities, such as interest, dividends, and similar investment income, at concessional rates. FIIs pay tax at 20 percent, while specified funds pay tax at 10 percent.

Tax on short-term capital gains

The Act treats gains arising from the sale of securities within the prescribed holding period as STCG. It imposes:

1. 30 percent tax on most short-term capital gains from securities
2. 20 percent tax on certain specified gains covered under Section 196.

Tax on long-term capital gains

Where investors hold securities beyond the prescribed long-term threshold, the gains qualify as LTCG. The Act applies a 12.5 percent tax rate to such gains, including gains exceeding INR 125,000 (US$1,034.4) in transactions covered under Section 198.

Restrictions on deductions

The regime also restricts deductions available to FIIs and specified funds. Where the taxpayer earns only securities income covered under this special framework, the Act disallows several business expenditure deductions and limits the availability of Chapter VIII deductions.

Separate treatment of capital gains

The Act further ring-fences securities-related capital gains by excluding certain loss-adjustment provisions from transactions covered under Section 210. This creates a distinct tax treatment for securities income earned by foreign investors and specified funds in India.

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Why this matters in the SEBI disgorgement context

The provision becomes relevant in cases such as the SAT’s 2026 ruling because:

• FIIs or investors may already have paid tax on trading profits under the Income-tax Act; but
• SEBI can still seek disgorgement of the full alleged unlawful gain under securities law.

SAT clarified that:

• Taxation and securities enforcement are separate legal mechanisms; and
• Any refund, adjustment, or tax relief must be pursued separately under tax law rather than through SEBI proceedings.

As a result, an investor may first pay tax on securities gains and later face disgorgement proceedings if regulators determine that the gains arose from fraudulent or manipulative conduct.

Implications for foreign investors

This ruling is relevant for foreign portfolio investors (FPIs), offshore funds, and multinational financial institutions participating in Indian capital markets.

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Foreign investors should note that SEBI may seek recovery of the full alleged unlawful gain irrespective of taxes already paid. Additionally, tax credits or adjustments may not automatically reduce regulatory liability.

This may increase litigation complexity and cash flow exposure in enforcement matters involving cross-border investment structures.

Conclusion

In its May 8, 2026 ruling, the Securities Appellate Tribunal has established a clear separation between tax treatment and securities law enforcement in India. The tribunal clarified that disgorgement under Securities and Exchange Board of India regulations seeks to eliminate the entirety of wrongful financial gains, irrespective of any taxes already paid on the disputed income.

For businesses and investors, particularly those active in Indian capital markets, the judgment underscores the need to strengthen governance frameworks, enhance compliance oversight, and adopt more robust regulatory risk management practices.

(US$1 = INR 95.82)

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