I am an Indian tax resident and I am looking to trade US stock options. However, there is no clarity on whether Indian residents are actually allowed to trade in US stock options. I spoke to one of the brokers that provides this facility, and this is what they stated regarding it.
I also found an RBI notification, last updated in Feb 2019, which mentions that derivative undertakings are allowed:
https://m.rbi.org.in//Scripts/BS_FemaNotifications.aspx?Id=155#sch1
So, are Indian tax residents actually allowed to trade US stock options or not? And is there any official source or authority from which I can get a definitive answer on this matter?
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Hey @Walker,
As per the RBI guidelines under LRS, Indian residents are not permitted to undertake overseas foreign exchange trading or leveraged derivative transactions. US stock options fall under this restricted category.
You can refer to the RBI clarification here: RBI FAQ on Overseas Investments and Derivatives
The link you shared regarding RBI rules under LRS mentions in Q2 that margin trading is not permitted. That is why, as shown in the screenshot I attached, brokers allow only cash accounts to be opened. Under such accounts, options can still be bought because we are paying the full premium upfront and not using any margin or borrowed funds to place the trade…?
RBI’s LRS rules prohibit overseas margin trading and margin-funded derivatives, but do not expressly ban fully funded option buying through cash accounts. Hence, some brokers allow only long options, covered calls, and cash-secured puts without leverage. However, since RBI has not given a clear approval for overseas options trading, most large brokers avoid offering such trading to Indian residents altogether.
So, since there are no completely clear instructions or regulations on this matter, there can be multiple interpretations. To avoid legal ambiguity and compliance risk, some brokers choose to stay away from offering such products altogether.
However, if someone were to take advantage of this ambiguity and trade US options markets and make profits, how should those profits be reported while filing taxes?
The profits would be treated as normal business income and ITR-3 needs to be filed for that.
Hope this helps!
Does it also need to be declared that the business income was generated from a foreign country under FATCA or something else
No, it does not need to be declared.
