Tax implications play a major 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 important for investors.
When it comes to tax on currency trading, the 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. A proper understanding of tax on forex trading is important for the trader who participates in a market that is not centralised, and carries out trades in futures and options.
How forex traders are taxed
Two types of taxes are levied on forex traders - direct and indirect. Direct tax is income tax that is imposed on the profits made from forex transactions. Indirect tax, meanwhile, could be the Goods and Services Tax (GST), Securities Transaction Tax (STT) or stamp duty.
It is important 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 that 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 taxation.
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, an 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 simple and all necessary information is available online, but make sure to trade only on trusted platforms.
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