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NRI Trading in Derivatives (Future and Options Trading) in India


NRI Trading in Derivatives (Future and Options Trading) in India

The NRI Trading in derivatives provides various great opportunities for hedging, speculation and providing margin trading. The derivatives are considered as the financial instruments that are very similar to the future contracts and options (F&O) and whose value is derived from the underlying assets.

The derivatives trading account has taken over 95% of the daily turnover in Indian Stock Market. Many NRIs show interest in trading in derivatives but the complexity in regulations makes it more challenging.

Mostly NRIs shows interest in trading in derivatives but it is challenging as the regulations made it hard. This is very important to understand the NRI Trading rules and Restrictions for the derivative trading in the Indian Stock Exchange. Any NRI, PIO and OCI card holders are permitted to trade in derivatives by the special set of rules.

NRI Derivative Trading

A derivative is just a financial contract or an agreement that is derived from various other assets or called Underlying like stocks, index, commodities and currencies, etc. The value or the price of the derivative simply depends on the price or value of its underlying.

The permission to all the NRIs is granted in order to trade in F&O section in India. One of the major differences in trading as an Indian Citizen and an NRI is that all the derivative trades are settled by the broker but for an NRI Client the F&O trades are settled by the custodian. Distinctly in some cases a broker who is a clearing member may offer to clear and settle the Future and Options trades for NRI. Thus, the broker attains the capacity of a clearing member that would apply for the CP code. The NRI customers are advised to keep in check with their broker for the services they tend to offer.

NRI Trading Rules and Regulations

The NRI Futures and Options Trading are permitted by the SEBI, market regulator, through a custodian via an NRO bank account. There are certain rules and regulations by SEBI, RBI and stock exchanges. Few restrictions are:

  1. Trading is possible out of the INR funds held in India.
  2. An NRI can trade in F&O by using the NRO bank account only.
  3. AN NRI cannot trade in F&O by using the NRE Account.
  4. The investments are not eligible for the repatriation benefits i.e. it can’t be moved to a foreign bank account without the permission of RBI.
NRI Custodial Participant in India

Important points about the CP code are:

  1. It is mandatory to trade in derivatives.
  2. Only one CP Code is allowed per investor at a time.
  3. The broker has tie up with third party custodian.
  4. All the funds for trading in F&O stays with the Custodian.
  5. The custodian provides broker updates trading limit for NRI customer.
  6. Broker helps in doing EOD settlement with the custodian for all transaction by the client.
  7. A clearing fees of ₹200 to ₹300 per crore over and the brokerage is charged by the broker.
  8. The custodial may ask for minimal of ₹25 lakhs of deposit or portfolio.

A custodian is among the financial service that is provided as registered with the SEBI and the member of clearing corporation of India. They help their customers in providing the CP code and later on clearing the F&O trades at the exchange on the behalf of the customer. All the funds are kept with the custodian in order to give the payment at the EOD. It is kept in the same way as the funds for NRI delivery trading are kept with bank and then given to the broker as they share the contract note with the bank at the end of the day.

NRI Derivatives Trading Tax

The trading income from the F&O trades in India is considered as the business income, and is taxed according to the Income Tax and slabs in India.

Tax on NRI Derivative Trading
Tax Futures Market Option Market
Securities Transaction Tax (STT) 0.1% of the transaction value (On Sell) Sell: 0.05% on Premium
Stamp Duty 0.002% (₹200 per crore) on buy-side 0.003% (₹300 per crore) on buy-side
SEBI Turnover Tax 0.0001% on turnover + GST 18% 0.0001% on turnover + GST 18%
Income Tax (on net profit) 30.9% (30% Tax + 3% service charges) 30.9% (30% Tax + 3% service charges)
The term bet profit for the Future Trading is counted as:
  1. The profit earned on squared off or expired future contracts.
  2. Market to market profits received on the outstanding positions at the EOD (End of the Day).
The term profit for the Options Trading is counted as:
  1. The premium received on the selling of an option contract.
  2. The premium paid at the time of buying an option is a loss.
  3. While exercising an option, the difference between the settlement price and the strike price is Profit.
  4. On assignment, the difference of the settlement price and the strike price is a loss.
  5. The Profit earned on squaring off the contract is considered as profit.
Challenges for the NRI Trading
  1. A custodial account is mandatory for F&O trading with the minimal ₹25 lakhs custody as portfolio size. The amount may vary by the custodian and the funds could be in cash or collaterals.
  2. The Net profit is taxed at 30% upfront. It has no exception or slabs.
  3. The NRIs may pay high brokerage as compares to Indian Residents.
  4. The principal amount in this account can be repatriated up to $1 million but the profits cannot be made.

The NRIs are allowed to trade in the derivatives but with certain set of restrictions, high entry barriers, more brokerage and taxes. F&O provides an opportunity to hedge and trade in the highly leveraged financial instruments. Future and Options trading seems highly profitable for the NRI investors.

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