How NRIs can trade in equity F&O

Derivatives trading is growing rapidly in India for many reasons like minimum capital investment, huge profits, easy entry and exit, etc but among all, making money fast is the most important thing.

Are you an NRI and want to know whether you can trade in stock futures and options or not? Yes, as per market regulator SEBI, NRIs can trade in equity F&O but there are certain conditions or rules.

Wondering how you can start trading F&O in India as an NRI? Learn everything in detail about the types of accounts required for F&O trading, the process of NRI derivatives trading, tax implications, and more.

Before we begin, let’s first understand what derivatives trading is.

What is Equity Derivative Trading?

Derivatives, as the name implies, are financial contracts that derive their value from an underlying asset, be it stocks / shares, commodities, indices, currencies, etc. Thus, the value of a derivative contract depends on the value of the asset. The term “equity derivatives" is used here to refer to derivative contracts whose value is based on the price performance of equities or equity indices.

There are two types of derivatives: Futures contracts and option contracts. A Futures contract allows the holder to buy/sell an asset on a specific date in the future. In contrast, an option contract provides the right, but not the obligation, to buy or sell an asset at a specified price at any time during the life of the contract. Equity derivatives trading involves buying and selling equity F&O contracts in the market.

F&O traders make profits by predicting the future price movement of an underlying asset. Options trading is the most popular form of derivatives trading. However, while option trading is rewarding, it is also extremely risky, and according to a January 2023 SEBI report, 9 out of 10 traders suffer losses when trading F&O.

Are NRIs allowed to trade in equity F&O?

Yes. Both residents and non-residents can trade equity derivatives or F&O contracts. However, trading in derivatives for NRIs is subject to mandatory norms of FEMA and other regulatory agencies such as SEBI, RBI, BSE, and NSE. NRIs can trade in equity F&O segments on a non-repatriation basis only through NRO non-PIS accounts. There are other conditions related to deposit opening, depository participant code (CP), and fund allocation.

Accounts Required for NRI Equity F&O Trading

An NRI needs several types of accounts to trade in the F&O segment. Here is the list:

1. NRO Bank Account

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F&O trading for NRI in India is only possible with an NRO savings account. If you want to trade equity derivatives as an NRI, you need to open an NRO bank account in India.

An NRO account allows non-residents to trade or invest in the Indian market on a non-repatriable basis. This means that money deposited in the NRO account is not fully repatriable and is subject to a maximum repatriation limit of 1 USD million per fiscal year.

In addition, interest earned on an NRO account is not tax-free as 30% TDS is payable.

2. NRI Trading Account

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A trading account is mandatory to place and execute buy and sell orders in various segments, be it equities, F&O, bonds, mutual funds, etc.

Many discount brokers in India offer NRIs the option of opening a 2-in-1 account, while bank-based full-service stock brokers allow NRIs to open an integrated 3-in-1 NRI trading account for seamless transactions.

3. NRI Demat Account

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Demat account is an online account essential for holding stocks, mutual funds, NCDs and other securities. The demat account is linked to the NRI trading account. When an NRI buys shares, the delivery of the shares is transferred to your NRI demat account. However, when you sell shares, the securities are debited from your demat account and the funds are credited to your NRI trading account.

The NRI trading and demat accounts are also linked to your NRO bank account. All fund transfer requests (deposits and withdrawals) will be processed through the linked account. Any dividend you receive from investing in shares will be credited to your NRO bank account after deducting TDS.

4. Custodial Account

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This is a special account for NRIs who wish to trade in equity derivatives. It can be opened with any SEBI registered custodial.

The role of the custodian is to hold the money and settle F&O trades on behalf of NRI clients. NRI trading brokerage houses also work with custodians to enable NRIs to open a custodial account for derivatives trading.

NRI Equity Derivative Trading Rules and Restrictions

• Equity F&O trading segment is only available on no-PIS NRO trading account.
• The investment made through an NRO account is not repatriable/transferrable and subject to a maximum ceiling of USD 1 million per financial year.
• NRI cannot trade in F&O using an NRE bank account.
• NRI does not require RBI PIS approval to trade in F&O.
• All the funds for F&O trading and F&O trades are settled with custodial.

NRI Equity F&O Trading Process

1. Open an NRO bank account in India. Most popular Indian banks like HDFC, ICICI, SBI, Axis, etc. offers both NRE and NRO bank accounts to NRI clients.
2. Open a non-repatriable NRI Trading and Demat account linked with NRO savings bank account.
3. Approach a clearing member to open a custodial account.
4. Obtain a custodial participant (CP) code from the clearing member/custodian for the allotment and settlement of F&O trades.
5. Since all the funds for trading F&O will be with your custodian, NRI have to allocate or transfer funds for F&O trading to custodian.
6. Place buy and sell orders for desired equity F&O contracts on the exchange using your broker’s trading platform.

Note: CP code is a unique tag or unique code assigned to each NRI client. When an NRI places F&O purchase and sell trade order, the CP code of the NRI needs to be entered into the system to execute and settle F&O orders.

NRI custodial Participant code rules

• CP code is mandatory for NRIs who wish to trade in F&O segment.
• An NRI can have only one CP code at a point of time.
• All the funds that NRI wishes to use for derivative trading is maintained with the custodian.
• Custodian intimates the broker about the F&O trading limit.
• Custodian charges a clearing fee of Rs 200 to Rs 300 per crore from NRI.
• Broker with whom an NRI holds a trading account charges brokerage fee on F&O trading.
• Custodial accounts may ask for a minimum of Rs 25 lakh of custody portfolio size.

Taxation on NRI Derivative Trading

All profits earned by an NRI from F&O trading are considered business income and are taxed according to the applicable tax rate.

All profits earned by an NRI from futures and options trading are taxed at 30% plus 3% service charge. Thus, the total TDS tax rate on derivatives trading by NRI is 30.90%. TDS is deducted on F&O profits earned in a calendar month.

For tax treatment, gain on futures contracts is considered as gain or loss on settled futures contracts or expired contracts and fair value gain and loss on outstanding positions in futures at the end of the day.

Options trading profit is:

• Profit or loss on square off of options contract is considered as profit or loss.
• Premium received by an NRI on sell of an options contract is a profit.
• Premium paid on purchase of an options contract is taken as loss.
• When an NRI exercise options, the difference between options exercise/settlement price and strike price is a profit.
• On assignment of an options contract, the difference between options exercise/settlement price and strike price is a loss.

Apart from the income tax, there are other charges applicable on NRI F&O trading such as STT, Stamp duty, SEBI turnover fee, and GST charges. Here are the tax details: