Is forex trading legal in India?

Forex trading is permitted in India, albeit under restrictions and limitations. An Indian forex trader or foreign currency enthusiast would do well to be up to scratch with the latest developments in the forex field. Especially as regards RBI notifications from time to time, a general awareness as to if Forex trading is legal in India does no harm. Pertinent Acts of Parliament should also be studied so that you may not fall foul of the law.

Forex trading legal in India: the exchanges

It is legal to trade forex with Indian exchanges such as BSE, NSE, MCX-SX, where they currently offer four pairs — USD/INR, JPY/INR, EUR/INR, GBP/INR — in derivatives (futures and options segment). In case you are trading with Indian brokers with a membership of Indian exchanges, it is right legal.

It is perfectly legal for retail Indian traders to invest in overseas equity markets. Overseas margin trading is illegal, according to RBI regulations.

Forex trading legal in India: corporates

Corporate entities are permitted to trade. The condition is that corporations may use only free dollars from their reserves. Free Dollar usage implies that they are not permitted to convert Indian currency to dollars, subsequently using them for trading. Furthermore, they may not go upwards of ten times leverage.

FEMA 1999

The Foreign Exchange Management Act or FEMA, 1999, liberalised foreign exchange controls , doing away with many restrictions on foreign investments. FEMA came into force on June 1, 2000.

The Aim of FEMA is to facilitate external trade and payments and promote an orderly forex market in the country.

Binary trades: Forex trading legal in India

Binary transactions are between the trader and the platform. There is no third party involvement. The role of the stock exchange is to facilitate trades between buyer and seller.

FEMA prohibits binary trades. Per the RBI’s liberalised remittance scheme, a person may not use money transferred abroad for speculative intent or to offer margin money for trading.

Forex trading legal in India: the role of exchanges

Individuals may trade forex on stock exchanges but with restrictions. There are just four currency pairs available. An investor may trade the four pairs by opening an account with PrimeFin or InvestBy.

Forex dealing restrictions

Forex feeling restrictions are given under FEMA’s Section 3. The Section says:

• Save an authorised person no one may deal in or transfer any foreign exchange to any person;
• In any manner, a person ought not to make any payment to/for the credit of any person resident outside India;
• Only an authorised person may receive any payment by order/on behalf of any person resident outside India.

Moreover, FEMA’s Section 4 says that no person resident in India is to acquire or transfer any foreign exchange.

Forex trading legal in India: contravening FEMA

As regards punishment, an offence in contravention of FEMA is deemed a civil offence punishable with a monetary amount as penalty. Following non-payment of penalty, there’s imprisonment.

Who Can trade forex in India?

Indian forex traders are expected to satisfy certain requirements before they start trading forex in India: a funded trading account, KYC compliance, trading platform.

An Indian forex trader cannot find it difficult to fulfill the above requirement. They must remember to sign up with a SEBI registered forex broker. Subsequently, downloading the free trading platform, they are all set.

Understandably, KYC compliance requires a few days to be completed. Hence, all brokers require that you go through the KYC process before you are onboarded. Identity verification is inescapable.

Aadhar card/passport copy can be a valid identification document. You could also submit your driving license for the same purpose. Your broker could, later on, ask for further documentation, including utility bills for address proof and a bank statement.

Forex trading legal in India: How is forex trading done in India?

We do a lot of things differently from the rest of the world — why not forex too?

In India, forex trading is only permitted when operated thru specific forex trading places, the base currency being INR.

Put another way, forex trading in India is only allowed for currency pairs that are benchmarked against the INR. This must have been implemented as a result of RBI circulars published in 2013.

Per reports, only the following currency pairs may be traded in India :

• INR/USD;
• INR/GBP;
• INR/JPY;
• INR/EUR;
• GBP/USD;
• and JPY/USD.

The last three listed currency pairs are always included in any list of popular forex pairs. This is because the respective countries’ economies are of sufficient strength to merit such an assumption.

Forex trading is taxable in India. Nonetheless, after the introduction of the GST in July 2017, the tax structure has undergone a transformation relative to former years. Fortunately for forex traders, the tax structure has changed for the better. Consequently, GST payable for such trading is now ‘tolerable’. Reportedly, it is situated between 0.058% and 0.18% of the taxable portion of the forex transaction.

GST is the only form of tax that is applicable to Forex trading activity as obtained in India.

In a brief recap, yes, in India forex trading is certainly legal. However, there are strict regulatory restrictions governing the conduct of forex trading. For instance, only exchange-regulated brokers are allowed to onboard Indian forex traders.

Regarding the kinds of currency markets obtainable in India, there are two, namely, spot and currency markets. Forex traders working in India have a prominent preference for trading in the futures market.

Conclusion

In India, Forex trading platforms are banned. Direct forex trading is not possible. However, you can trade forex thru stock exchanges. This trading comes with limitations. The base currency you are trading upon has to be INR or Indian Rupee. The restrictions have been put in place to keep Indian forex traders safe. Likewise, there are good reasons why online forex trading platforms are illegal in India.