Go to most countries in the world and you’re guaranteed three things: adorable dogs, good food, and taxes. India is no different. If you trade in securities, the profits will be taxed. But does that mean forex trading taxes in India exist? We’re going to help you find out!
Do You Have to Pay Forex Trading Income Tax?
Yes, forex trading income tax does exist in India. But the way it works is relatively different from what you’d experience in equity trading. However, there are three factors you need to know before we jump into forex taxes.
First, income from f&o can be treated as business income or income from other sources. Most forex traders are known to declare their gains as business income. Later on, you will see that this move has merit.
Second, delivery trading is simply not allowed for currency pairs in India. All forex trades are cash-settled – profits and losses are in INR.
This may come as a surprise to those expecting a bag of USD or EUR to be delivered to their doorstep or demat account. Third, trading currency pairs in India is only possible through exchange-traded derivatives.
What we’re about to reveal next may be confusing, but it becomes clear when you understand that it is what the definition and laws dictate.
Even though derivatives are speculative, income from trading derivatives can be classified as “non-speculative” business income. This rule extends to futures and options for currency pairs.
We’ve narrowed down the three important points for forex taxation:
- Delivery trading is not allowed when for forex pair derivatives in India
- Income gained from trading forex f&o can be treated as business income
- Business income from f&o is considered to be non-speculative
Now that you’re aware that there are currency trading taxes in India, it’s time we moved on to the actual type of forex taxes and the rate of taxation that’s applicable across various tax slabs.
How Much is Forex Trading Income Tax in India?
There are two types of taxes that a forex trader must pay to the government. The first is a direct tax which is nothing but the tax rate on gains applicable as per your I-T slab. The following table contains all the tax slabs in India:
| Income (in Rs) | Tax Rate Applicable |
| 0 to 2.5 lakhs | None |
| 2.5 lakhs to 3 lakhs | 5% |
| 3 lakhs to 5 lakhs | 5% |
| 5 lakhs to 7.5 lakhs | 10% |
| 7.5 lakhs to 10 lakhs | 15% |
| 10 lakhs to 12.50 lakhs | 20% |
| 12.5 lakhs to 15 lakhs | 25% |
| 15 lakhs & above | 30% |
The second is an indirect tax that commonly includes:
- Goods and Services Tax (GST)
- Stamp duty (varies by state)
- Brokerage fees (varies by broker)
- SEBI charges
What is the GST Rate on Forex Trading?
That said, the GST on foreign exchange derivatives trading is known to vary. There are three slabs that have been created to ensure that GST on gains from forex trading transactions is easy to understand, process, and execute.
The GST rates for the three forex transactions slabs are as follows:
| Slab | Transaction Value | Taxable Value | Tax Rate | GST (Maximum) |
| I | <Rs. 1 lakh | 1% of transaction value | 18% | Rs. 180 |
| II | >Rs. 1 lakh but ≤ Rs. 10 lakhs | Rs. 1,000 + 0.5% above 1 lakh | 18% | Rs. 180 to Rs. 990 |
| III | >10 lakhs | Rs. 5,500 + 0.1% of transaction value | 18% | Rs. 990 to Rs. 60,000 |
There are other charges on top of the GST on foreign exchange derivatives. There’s a fee to be paid to exchanges that is Rs. 1.10 per lakh for currency futures and Rs. 40 per lakh on the premium for currency options.
You may also have to pay a fee to clearing members, which stands at Rs. 0.25 per lakh for currency futures and Rs. 7.5 per lakh for currency options. Similarly, you’ll have to pay stamp duty as well but that depends on the state you’re in.
Not to forget, there’s even a charge in the form of the Investor Protection Fund (IPF) which is 0.000050% for futures and 0.0020 for options. Furthermore, there are ways to offset tax when trading currency f&o.
For example, a loss incurred on a non-speculative business can be offset against income from a speculative business or any other income that does not include income from salary.
Conclusion
Forex trading income tax is taxed in two ways: direct and indirect. You’ll have to pay a direct tax that’s calculated based on your I-T slab. An indirect tax is applicable in the form of GST, SEBI charges, IPF, and others.
Furthermore, knowing all these indirect taxes and charges as well as your taxable income is useful. It can help you plan your trades and manage your taxes better. For more interesting forex stories, read these blogs:
1. Forex Nicknames Explained: Cable, Fiber, Chunnel, & More!
2. Forex Market Hours & Holidays in India for 2022
3. Sula Vineyards IPO: Wine, Dine & Shine?
FAQs
Q. Do you pay income tax on forex trading?
Yes, a forex trader will have to pay income tax on gains received by trading forex. The tax slab and income tax rules for forex trading are as follows:
| Income (in Rs) | Forex Trading Tax |
| 0 to 2.5 lakhs | None |
| 2.5 lakhs to 3 lakhs | 5% |
| 3 lakhs to 5 lakhs | 5% |
| 5 lakhs to 7.5 lakhs | 10% |
| 7.5 lakhs to 10 lakhs | 15% |
| 10 lakhs to 12.50 lakhs | 20% |
| 12.5 lakhs to 15 lakhs | 25% |
| 15 lakhs & above | 30% |
| Slab | Amount Transacted | Taxable Value | Tax Rate | GST (Maximum) |
| I | <Rs. 1 lakh | 1% of transaction value | 18% | Rs. 180 |
| II | >Rs. 1 lakh but ≤ Rs. 10 lakhs | Rs. 1,000 + 0.5% above 1 lakh | 18% | Rs. 180 to Rs. 990 |
| III | >10 lakhs | Rs. 5,500 + 0.1% of transaction value | 18% | Rs. 990 to Rs. 60,000 |
Q. How much tax do forex traders pay?
The amount of tax a forex trader pays will depend on their capital gains. That said, the gains are based on the I-T slab of the trader in question. Not to forget, GST charges are applicable based on the transacted value.
For example, if you’re forex trading amount is in excess of Rs. 10 lakhs, you’ll have to pay GST of Rs. 990 to Rs. 60,000 (Rs. 5,500 + 0.1% of transacted value) as well as tax based on your I-T slab.
Q. What is the punishment for forex trading in India?
There’s no punishment for trading forex derivatives in India through SEBI-authorized brokers. We’ve covered the story here: Is Forex Trading Legal in India? Punishment for Forex Trading?
Do you know what’s important for trading currency f&o? Charts! Here’s a helpful tutorial on how you can draw on charts!
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.
