Tax on Forex Trading in India

In this Blog , we are going to discuss about the Tax on Forex Trading in India.

Generally there are confusions around the taxation system on Forex Trading in India.

The Common Confusions are :

Is forex trading legal or illegal?
When I trade foreign currency and make profit out of it, Should I pay taxes on forex trading income?

Let’s see about the first topic whether forex is legal or illegal?

Forex trading is of course legal in India if it is done through a registered Indian forex broker.

Let’s have a look at the logic behind RBI Policy. According to RBI, when you trade Euro/USD with a Non-Indian broker and incurred loss in trading then you would buy Euro/USD from RBI which will results in deficit of foreign currency reserve with RBI.

Likewise, when everybody starts trading forex with forex brokers outside India in which majority of the people lose then the RBI will also have to lose a large amount of US dollars.

This will create a pressure to buy more US dollars by selling INR at a cheaper rates.

This will result in devaluation/depreciation of INR. This is the simple logic why forex is limited in India and forex trading is done by limited people.

Let’s Discuss Number 2 Question , Would I have to pay any Tax if I trade foreign currency and make profit out of it. How to pay Tax?

Types of Forex trading in India:

Trading under SEBI registered brokers in India. In this category we are able to trade only in futures and options, but while using this traders are not quite happy with it. Since forex market will not be opened for 24 hours and spot market is not available. There are also some limitations in trading certain currency pairs , so mostly Indian traders prefer foreign forex brokers with payment options through local dealers and e wallets.

Lets first understand five major tax filings processes:

Number one salary, that is any income from salary or pension will be covered.
Number two, income from house property. This is mostly house rental income.
Number three, income from capital gains. If you sell any of the capital assets such as mutual funds, shares and house property will come under this
Number four ,profit and gains from business. This is only when you’re self-employed or runs any business.

Number five, income from other sources. This is any income from savings bank account, interest, fixed deposits or you can also file for any online generated income.

Tax on Forex Trading in India:

If we happen to trade through SEBI approved brokers and getting any profit, third point that is income from capital gains tax lab will be applied. We may need to file taxes under this clause. By doing this we will get an advantage that is in case , lets say we make loss, we can apply “Set off” option. “Set off” is nothing but any loss amount that you make can be carried forward to the next year and debited from that year’s profit amount.

If we are using any foreign brokers for our trading transactions and we are using any local dealers or e wallets then we can still file a tax but we wont be able use some benefits. We will have to file taxes under other sources. That is the fifth point ” income from other sources”. In this clause we will be able to file taxes but we cannot use the above “Set Off” option given for Indian SEBI Approved Brokers.

Comparatively tax amount would be high when filed under other sources. Overall in forex trading, we can file a tax for any amount we make out of it , we just need to follow the above clauses and steps.

Hope This content provided enough information for you to file tax if you are forex trader and trading with Indian or Foreign Trader.

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