July 25, 2025

Trading in US Futures & Options After Returning to India: FEMA, Tax & Compliance Explained

With the rise in global investing, many Indian-origin individuals have built significant exposure to US markets via platforms like Interactive Brokers, TD Ameritrade, and Charles Schwab. A common question arises when such investors permanently return to India:

Can they continue trading in US Futures & Options (F&O) after becoming Indian residents?

This blog addresses that very concern — breaking down the regulatory framework under FEMA, Indian tax law, and US tax rules. Specifically curated for Indian citizens returning from the US, this article provides clarity on continuing with US derivative trades while remaining compliant.

FEMA Rules for Returning Residents Trading in US Derivatives

As per the Foreign Exchange Management Act, 1999 (FEMA), once an individual qualifies as a “resident in India” [Section 2(v)], any dealings in foreign assets are subject to FEMA regulations.

Fortunately, Section 6(4) of FEMA offers relief. It permits Indian residents to retain and manage assets acquired while they were non-residents:

"A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired when he was resident outside India."

While traditional “foreign securities” are covered, the inclusion of “any other instrument denominated or expressed in foreign currency” hints that Futures & Options contracts may fall under this provision. However, the lack of explicit RBI recognition keeps some grey area alive.

Conclusion: You may continue trading in US F&O using funds retained abroad prior to returning to India.

What’s not allowed: Sending money from India for new derivative trades post-return. This violates FEMA and LRS provisions.

Notably, RBI's FAQ on the Liberalised Remittance Scheme (LRS) clearly states:

“Remittance under the Scheme is not available for margin trading or derivative transactions.”

So, once you are a FEMA resident, refrain from sending Indian funds to top up or margin your US brokerage account. Continue trades only using existing offshore balances.

US Taxation for Non-Resident Indians Trading US F&O

A. During US Tax Residency
When you were a US tax resident (green card holder or substantial presence), derivative trades were taxed under:

Section 1234 – Options income
Section 1234B – Securities futures contracts
Section 1256 – Regulated futures & non-equity options

Section 1256 offers favorable 60/40 capital gains treatment — 60% long-term and 40% short-term, regardless of holding period. It also mandates year-end mark-to-market reporting.

B. After Becoming a Non-Resident Alien (NRA)
Post-return, your US tax status becomes Non-Resident Alien (NRA). In this phase, the US only taxes:

Income effectively connected with a US trade/business (ECI), or
Specific passive incomes (FDAP)

As per IRC Section 864(b)(2)(A)(ii) and Revenue Ruling 88-3, trading securities or derivatives on personal account does not constitute a US trade/business. Therefore, in most cases:

No US tax is due on gains from US F&O trading by NRAs.

Exceptions:

If you spend more than 183 days in the US in a calendar year, Section 871(a)(2) applies — a flat 30% tax on capital gains.
If you have a permanent establishment in the US.

Action Point: Submit Form W-8BEN to your US broker post-return. This ensures you’re treated as a non-resident for tax purposes, helping avoid incorrect withholding.

Indian Income Tax Treatment of US Derivative Trading

Once you qualify as a resident under Indian tax law (Section 6, Income-tax Act, 1961), your global income becomes taxable in India — including your US F&O gains.

A. Business Income vs. Capital Gains
Your F&O gains must be classified correctly. The classification depends on:

Volume of trades
Trading frequency
Your intent and holding patterns

ICAI’s Guidance Note and various court rulings like CIT v. P.K.N. and Co Ltd, G. Venkataswami Naidu & Co. support that facts determine whether the trades are business income or capital gains.

CBDT Circulars 4/2007 and 6/2016 permit taxpayers to choose their classification — but expect consistency year after year.

B. If Considered as Business Income

Are US F&O Speculative or Non-Speculative?
Under Section 43(5) of the Income-tax Act:

Speculative = No actual delivery
But if settled on a recognised stock exchange → Not speculative

Since US exchanges are not recognised in India, such F&O trades often fall under speculative income.

Consequences of Speculative Income:

Losses only set off against speculative profits
Carry-forward allowed for 4 years (if ITR filed on time)
Intraday trades = always speculative

Compliance Requirements:

File ITR-3
No presumptive taxation under Section 44AD
Audit under Section 44AB if turnover > ₹10 crore (subject to digital transaction limits)
Register for GST (import of service = broker commission)
Pay IGST under RCM
Disclose in Schedule FA and Schedule FSI
File Form 67 to claim any foreign tax credit

C. If Considered as Capital Gains
If your trading activity qualifies as investment:

Short-Term Capital Gains (STCG) – taxed at slab rates
Long-Term Capital Gains (LTCG) – on unlisted securities at 12.5% (holding period: 24+ months)

No GST or tax audit required

During the RNOR (Resident but Not Ordinarily Resident) phase, some passive foreign income may not be taxed. But if trades show high frequency or business intent, Indian authorities may apply regular tax rules.

Key Compliance Tips for Returning NRIs

Do not send money from Indian accounts to your US trading account after becoming FEMA resident
Continue trading only from pre-existing US balances
File W-8BEN with your broker
Select a tax treatment (business vs. capital gains) and maintain consistency
Know that intraday = speculative
Register under GST if brokerage fees are treated as import of service
Keep trade statements, brokerage records, and forex conversion records handy
Use prescribed forex rates for reporting
File Form 67 for any US tax paid