As per the Liberalized Remittance Scheme (LRS), an Indian citizen can send $250,000 per year. Can this amount be used for investments in futures & options (F&O) trading on international listed derivatives. For example, can a trading account be opened with an international broker in foreign geography to trade exchange products such as S&P 500 futures, crude oil options, gold, Comex (F&O market for commodities), etc. What is the taxation if the account is opened in Dubai, UAE or Singapore; jurisdictions which have double taxation avoidance agreement (DTAA) with India?
—Name withheld on request
Remittances under LRS are allowed only in respect of permissible capital or current account transactions or a combination of both. However, investment in overseas derivatives is not a permitted capital account transaction since it is prohibited under the overseas portfolio investment rules. Further, transactions in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty are also not allowed under LRS. Therefore, you would not be permitted to remit funds under LRS for F&O trading outside India.
As to the question of whether a trading account can be opened with an international broker in foreign geography to trade exchange products, such transaction is not permissible under FEMA (Foreign Exchange Mangement Act) in the first place. However, the fact of illegality is immaterial for the purpose of taxation under the Indian tax law. The tax department is not concerned with the taint of illegality of the income or its source. Thus, a taxpayer may be prosecuted for an offence and simultaneously be also taxed on the income arising from the illegal transaction.
Being an Indian tax resident, your worldwide income becomes chargeable to tax in India. The distributive rules under a DTAA assign to each respective country, the right to tax specific category incomes that arise in the source state. Such rights may be exclusive taxing rights or shared taxing rights between both nations. However, a DTAA cannot take away the right of the resident country to tax its own residents except under limited circumstances. Granting foreign tax credit by the resident country is one such circumstance whereby under DTAA obligations, it would have to grant foreign tax credit to its own taxpayer.
Thus, while your worldwide income including the income earned in UAE or Singapore from F&O trading would be liable to taxation in India, you may take the benefit of the respective DTAA to avail foreign tax credit in India against the income tax chargeable on such income under the Indian tax law.
When it comes to the taxation under the Indian tax law, the income earned from F&O trading activity (in stocks, shares and commodity) that is carried out outside India would be characterized as business income and specifically from a ‘speculation business’, since it would be carried out on a stock exchange located outside India which do not qualify as ‘recognized stock exchanges’.
However, if the F&O trading activity results in a loss, then there are restrictions on set-off and carry forward of losses from the speculation business. Loss in a speculative business can be set-off only against income from speculative business and pending full set-off, it can be carried forward only for four consecutive assessment years.
Harshal Bhuta is partner at P.R. Bhuta & Co. Chartered Accountants.
