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How To Pay Taxes As A Forex Trader

11 Sep 2023

Tax implications play a significant role in all investment decisions like stocks and bonds and even insurance. A nuanced understanding of what is taxable, what is exempt and what percentage is levied on what amount of earnings is extremely pertinent to the prudent investor. As forex trading gains more and more ground, there are many benefits of currency trading. A 360-degree view of forex trading tax has become essential for investors. You may visit any country in the world, and you are assured of certain things common to most nations, like good food and taxes. Everything you transact in today has a tax levied on it. When you invest or sell your investment for profit, you will inevitably be taxed. Taxation is a part of life in any country, and as such, you should be well-versed in its details. In case you are not, you may inadvertently break the law by avoiding tax payment, and the consequences of that just mean penalties. To save yourself from hassles, you should pay all your taxes on time and be worry-free. If you are engaging in trading forex (foreign exchange), you need to know how and when to pay your taxes and what taxes may be levied. 

When it comes to tax on currency trading, investors are often confused under what category their gains will be taxed. This is because there is no one way in which forex traders are taxed. Although there is a tax that is levied on forex trading, it is quite different in the way taxes are levied with equity trading. This is why traders and investors are often puzzled by its nature. A proper understanding of tax on forex trading is essential for the forex trader who participates in a market that is not centralized and carries out trades in futures and options.

Some Basics of Forex Taxation

Forex trading online is a boon to many traders who are completely involved in the currency markets and trading thereof. However, many fail to consider taxation in the enthusiasm of making gains. There are three variables to keep in mind before you jump into any trading activity concerning currencies. The very nature of forex trading online may prevent you from doing this, as access to currency trading is easy and convenient. Still, you must pay heed to the following: 

  • First and foremost, any income that is gained from futures and options (F & O) trading is treated like income from other sources or a business income. In fact, those forex traders who are knowledgeable about taxation, declare any gains from currency markets as income from the business. This is a move that has some merit. 
  • The second important point to note is that, for currency pairs in India, delivery trading is not permitted. So, all trades in the currency markets, from an Indian standpoint, are settled as cash settlements. This means that profits and losses are settled in INR only. This may come as a shock for those traders who are under the misconception that a sack full of EUR will be delivered to the doorstep of their Demat account
  • Thirdly, the trading of currency pairs in India can only be enabled via exchanged traded futures and options (derivatives) contracts. Now, this may come as a surprise to some seasoned traders, but although derivatives are classified as “speculative”, income from such trading is categorized as “non-speculative” income from the business. This is a rule that is true of derivatives trading with pairs of currencies as well. 

How Forex Traders Are Taxed

With futures and options trading in forex, two types of taxes are levied on forex traders - direct and indirect. Direct tax is an income tax imposed on the profits made from forex transactions. Indirect tax, meanwhile, could be the Goods and Services Tax (GST), Securities Transaction Tax (STT), and stamp duty.

It is crucial to find out under which of these categories you will be taxed. If trading in forex is a business for the trader, the income arising from it will be taxed as business income. Otherwise, it must be taxed under 'income from other sources' at the rate applicable to individuals. GST is charged in three slabs on forex transactions. These are:

1. Less than Rs 1 Lakh: The taxable value on transactions smaller than that of Rs 1 Lakh is only 1% of the transaction amount. The minimum amount levied must be Rs 250. This taxable value is not the final tax you will be required to pay but is simply representative of the value that is liable for taxation.

The tax amount, however, is 18% of the taxable value for such transactions. This is the amount that is payable as GST. A maximum of Rs 180 can be charged as GST for forex transactions of up to Rs 1 Lakh.

2. Between Rs 1 Lakh and Rs 10 Lakh: The taxable value of transactions falling within this bracket is Rs 1,000 + 0.5% of the amount more than Rs 1 Lakh. The tax amount, however, remains at 18% of the taxable value. This is why the GST on such transactions can be between Rs 180 and Rs 990.

3. Greater than Rs 10 Lakh: The taxable value of transactions of more than Rs 10 Lakh is Rs 5,500 + 0.1% of the transaction amount. The tax amount is 18% of the taxable value, so the final GST amount falls between Rs 990 and Rs 60,000.

Apart from these GST implications, forex traders must also pay charges. Stamp duties, as per the state laws, are applicable on forex transactions, along with myriad transaction charges such as brokerage fees. Hence, keeping the above factors in mind, one of the advantages of early tax planning would be that you won’t pay unnecessary taxes.

A Note on Other Charges

For some traders and investors, the charges arising from taxation are enough to warrant the avoidance of trading in the currency markets. However, although taxation matters when considering an investor’s portfolio, the gains to be made in forex are plenty. An awareness of taxation and other charges is essential to make sure that profits earned are not made redundant. Investors must consider that there are fees to be paid to exchanges, as well as brokerage fees that vary from one broker to the next. There are also the premiums to be paid in derivatives trading contracts. 


In India, there are restrictions on some types of forex trading such as binary trading and trading in pairs where the base currency is not the Indian Rupee. However, the ethical practice of currency trading can be a good addition to an investor’s portfolio, delivering respectable returns. In a milieu where forex trading is relatively tightly regulated, a good understanding of its taxation will help you trade with peace of mind. Forex Trading Online is now straightforward and all necessary information is available online, but make sure to trade only on trusted platforms.


Related Articles: What Are Cross Currency Pairs And What Do They Mean? | How does a Spread Contract Help in Currency Trading | How Currency Fluctuations Impact your Financial Plan 


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