As an investor, you should be looking to build a diverse portfolio of financial instruments that can net your strong returns over the medium to long-term. One such financial instrument you could consider is forex trading. Forex trading essentially involves you capitalising on the growth or decline of currencies. For instance, you might buy the dollar at X price, with the aim of selling it when it appreciates to a price Y higher than X. The principle remains the same as any other investment.
Also similar to the case of most investments you make, there are taxes you may have to pay. In this article we will focus on the capital gains tax on forex trading, or the tax on the gains you make from forex trading.
The basics of Forex Trading
If you are trading through a SEBI registered broker, then the forex tax you will have to pay is divided into short term capital gains tax (STCG) and long term capital gains tax (LTCG). However, given the peculiar situation that forex trading finds itself in in India, wherein you are not allowed to spot trade, or trade currency pairs that do not include the rupee, the taxation on forex gains is not as simple. Let’s attempt to break it down.
Taxes on forex income
Right off the bat, forex trading in the country is split between trading through SEBI registered brokers, and foreign, unregulated brokers. The case for the former is fairly simple. If you are trading through a SEBI registered broker, the income you earn from your forex trading will be taxed under capital gains tax. Therefore, any tax you pay will also be charged in accordance with the capital gains tax brackets in the country. Here is a short breakdown :
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Tax Type
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Tax Rate
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Short Term Capital Gains
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(If security transactions are not counted), STCG is added to the ITR as per the citizen’s income slab
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Short Term Capital Gains
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20%
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Long Term Capital Gains
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20%
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Long term Capital gains
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10% Over Rs 1,00,000
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However, it is oftentimes the case that investors end up making forex gains from brokers that are not registered with SEBI. If this is the case, then the income that is earned is taxed under the ‘other income sources' category. This makes the process a little less straightforward, and this is due to the legal grey area that exists around this type of forex trading that might include non Rupee currency pairs.
While people will likely employ a CA to help them correctly file forex tax from these sources, keep in mind that there is a lack of certainty around the legality of this type of trading, and could very well invite legal action.
Conclusion.
For most people however, if you are trading through official means and a SEBI registered broker, the taxes you pay on your forex gains will be in line with capital gains taxes, as they will be taxed under this category. Understanding the taxes on your forex gains is important, as you could end up in a financial and legal mess if you cannot correctly file these taxes.
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