With a daily turnover of over $6.6 trillion, the Forex market can be a goldmine to Forex traders. In India, Forex trading is classified as an income-generating activity and taxes are levied like any other profession. This means that Indian residents have to acquaint themselves with the tax on Forex trading in India because the non-compliance carries significant financial penalties and jail time in some cases. When the Good and Service Tax (GST) was implemented on July 1, 2017, the tax on Forex trading in India changed.
Tax Classification in India
The Central Board of Direct Taxes (CBDT) in India breaks down the taxes payable into four categories:
- Long-term Capital Gains
For a trade to be considered for long-term capital gains, you need to have held the investment for at least one year – 365 days. That means that any profits you make from buying or selling Forex will be treated as a capital gain. According to section 10 (38) of the Income Tax Act, 1961, capital gains are tax exempt. Therefore, you won’t have to pay any taxes on such profits. Also, note that any losses considered as capital loss cannot be carried forward or adjusted; it is a dead loss. Short-term retail traders do not fall into this category.
When considering capital gains, you must take into account:
- The Security Transaction Tax (STT) tax, which is 0.025% of the selling value,
- Stamp duty of 0.02% of the total turnover
- Regulatory charges of about 0.004% on daily turnover
For all this to be applicable, your Forex trading activities in India must be done via a recognised exchange licensed by SEBI.
- Short-Term Capital Gains
These are gains made when you buy and hold Forex for more than a day but less than a year (365 days). In this case, you are liable to pay a 15% tax on any profits you make. Note that there is a threshold for this tax to be applicable. That means if you do not make substantial profits, the tax due will be 0.
- Speculative Business Income
This is often targeted at intraday traders. According to Section 43 (5) of the Income Tax Act, profits made from speculative are included in your total income. That means it will be taxed according to your overall income slab (we will cover this later on in this article).
- Non-Speculative Business Income
Options and futures trading in India is categorised as non-speculative business income. Like the speculative Forex trading income, the non-speculative business income will be added to your total income, and you will be taxed based on your overall income slab. Note that since this income is regarded as a business income, you can deduct any business expenses from it, which tends to reduce your taxable income.
You will generally be required to fill in the ITR‐4SUGAM forms. Here are the guidelines on how to go about this. You can file your taxes here.
When you file your tax returns as scheduled, you can carry forward losses from speculative and intraday trading for up to eight years. This means you can use these losses to offset gains from other trading activities or your overall income, thus reducing tax payable. For example, suppose you incur Forex trading losses of about Rs. 200,000 this year; then the following year, you make a profit of Rs. 300,000. In this case, you can deduct the previous losses and only pay taxes on income of Rs. 100,000.
Tax Ratios on Forex
Typically, 18% GTS is applicable for all taxable value in Forex transactions.
| Slab | Gross amount of currency exchanged | Value of Supply | ||
| (A) | (B) | Result | ||
| 1 | Amount up to 1,00,000 | 1% of the gross amount of currency exchanged | Rs. 250 | Whichever is Higher (A) or (B) |
| 2 | An amount exceeding 1,00,000 rupees and up to 10,00,000 rupees | 0.50% of the (total amount of currency exchanged less 1,00,000) | Rs. 1,000 | A + B |
| 3 | Amount exceeding 10,00,000 | 0.10% of the (total amount of currency exchanged less 10,00,000) + Rs 5,500 | Rs. 60,000 | Whichever is Lower (A) or (B) |
Slab 1: Up to Rs 1 lakh
Taxable value = 1% of the Forex transaction
For Forex transactions up to a maximum of Rs. 25000, the minimum taxable value is Rs. 250, with 18% of this taxable value paid as GST. That means you will have to pay a tax of Rs. 45 – this is the minimum GST payable for Slab 1.
The minimum value is 1% of the total value of the Forex transaction. (i.e., 1% x Rs 25000 = 250)
The upper limit for slab 1 is Rs. 1,00,000. This means that the maximum value is 1% x 100000 = Rs 1000
The maximum GST payable is Rs. 180, i.e., 18% of Rs. 1000
Slab 2: Rs 1 lakh to Rs. 10 lakhs
The taxable value in Slab 2 = 1000 + 0.5% of the amount above 1 lakh
The maximum tax payable is Rs. 990
The minimum tax payable is Rs. 180
Slab 3: More than Rs. 10 lakhs
Taxable value = 5500 + 0.1% of the amount above 10 lakhs
Assume that your Forex trade is Rs. 20 lakhs. In this case, the taxable value is:
5500 + (0.1% x 10 lakh) = 6500
GTS paid =18% x 6500 = 1170
Note that the maximum GTS in Forex trading is Rs 60000
Taxes on CFDs
When trading Forex CFDs with an offshore broker, they are not obligated to report your income to tax authorities. This is unlike other countries like the US, where the brokerage must report all your financial income for taxation.
So, how would you file your tax on Forex trading in India? Remember that brokers are also not obligated to give you your capital gains tax statements. This means that you have to keep track of all your Forex profits and losses for tax purposes.
If you do not know the amount of tax you are supposed to file, you can go to the Central Board of Direct Taxes (CBDT) website and calculate it. Cheers!