Options Trading in USA from India with USD earned via employment in USA when residing in USA, FEMA

[Raghav San]

Hi, I am a Indian citizen who resided in USA for 10+ years and relocating back to India.

Is it legal here in India to do options trading in USA after returning back to India?

I know money remitted from India via LRS can't be used for derivatives trading but I don't know if trading US derivatives (OPTIONS) with money earned while in US is legal for an Indian citizen staying in India.

Thanks in advance !!

Posts / Replies

[YAGAY andSUN]

In your situation, where you’re an Indian citizen who has spent time in the USA and is now relocating back to India, it’s important to understand the legal framework around trading US options from India.

Here’s a breakdown of key points:

1. FEMA (Foreign Exchange Management Act) Regulations: Under FEMA, Indian residents (those residing in India for more than 182 days during the preceding financial year) are restricted in certain ways when it comes to foreign investments and financial transactions. Specifically, trading in foreign derivatives such as options could fall under the purview of regulations governing foreign exchange transactions.
2. LRS (Liberalized Remittance Scheme): The LRS permits Indian residents to remit money abroad for permissible transactions, such as investments, education, or travel. However, it is explicitly prohibited to use LRS funds for trading in derivatives or speculative activities abroad (including foreign markets like the US). You are correct that money remitted under LRS cannot be used for options trading.
3. Trading US Options While in India: As an Indian citizen residing in India, your ability to trade US derivatives like options is governed by the regulations set forth by the Reserve Bank of India (RBI) and SEBI (Securities and Exchange Board of India). While you may trade US equities and other non-derivative instruments through a registered broker in India, derivatives trading (including options) on foreign exchanges is typically not allowed unless the trades are routed through a properly regulated channel.
   • If you are using funds that you earned while in the US (i.e., your overseas income), the legality of using these funds would depend on whether they have been remitted back to India or if they remain in your US bank account. If the funds remain in the US and you’re trading through a US brokerage, you may be able to do so legally, since you’d be accessing the US market from the US. However, once you return to India and become a resident again, you might face restrictions depending on the specific circumstances of the income and the trading activity.
4. US Brokerage Account: Some Indian residents may still be able to hold and trade in US accounts via international brokers. However, this does not completely eliminate legal considerations. Indian residents can sometimes trade in US financial markets if they follow the relevant reporting requirements and if their funds are considered “earned” outside India.
5. SEBI's Stand on Foreign Derivatives Trading: SEBI’s stance on trading foreign derivatives (including options) is somewhat restrictive, as it aims to prevent excessive speculation and protect Indian investors. Generally, trading foreign derivatives is not allowed directly unless through a platform that is registered with SEBI.

Conclusion:

To summarize:

• It’s not illegal for an Indian citizen to trade in US options, provided they are not using money remitted via LRS.
• You can trade US options with your US-earned income if you keep the funds in a US account and continue trading through a US-based brokerage.
• Once you are residing in India, be mindful of the regulations around foreign derivative trading. Direct trading in US options may be restricted by SEBI and RBI policies.

You should consider consulting a tax and financial advisor to ensure compliance with both Indian and US laws when trading internationally from India.

[Raghav San]

Yagay,

Appreciate you spending time and helping me with a detailed explanation. Please check my answers inline below.

derivatives trading (including options) on foreign exchanges is typically not allowed unless the trades are routed through a properly regulated channel 

---- [RAGHAV] I have a US based brokerage Charles Schwab One International Account and they do allow trading options in US markets from India.

the legality of using these funds would depend on whether they have been remitted back to India or if they remain in your US bank account 

---- [RAGHAV] The funds were never remitted to India. They are in my US bank account.

However, once you return to India and become a resident again, you might face restrictions depending on the specific circumstances of the income and the trading activity 

---- [RAGHAV] I am in India and just finished my RONR period 3 days back.

Generally, trading foreign derivatives is not allowed directly unless through a platform that is registered with SEBI 

---- [RAGHAV] Is there a way to check if Charles Schwab is a platform that is registered with SEBI 

Once you are residing in India, be mindful of the regulations around foreign derivative trading. Direct trading in US options may be restricted by SEBI and RBI policies 

---- [RAGHAV] I am now a resident of India and living in India. 

You should consider consulting a tax and financial advisor to ensure compliance with both Indian and US laws when trading internationally from India  

---- [RAGHAV] I tried contacting several CA's in this context and got the same answer from almost everyone "check with a FEMA expert". If you have any contacts familiar with both Indian and US laws and provides paid service can you please share.

[YAGAY andSUN]

You may check from BIG-4 to sort out your query.

[Shilpi Jain]

The money that you have earned when you were in the US, have you kept it still in a bank account in the US or this has been brought to India and kept in a foreign currency account in India like EEFC? 

Or is this converted into INR and moved to NRE/NRO account?

However, on going through entry k of Schedule I of Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 it can be noted that you can undertake derivative contracts. This is USD 250,000 per financial year.

This has been introduced with effect from February 27, 2019 by the Foreign Exchange Management (Permissible Capital Account Transactions) (Amendment) Regulations, 2019, vide Notification no. FEMA 391/2019-RB dated February 26, 2019 published in the Official Gazette of Government of India [Extraordinary, Part II – Section 3, sub-Section (i)] dated February 27, 2019.

You could consider these updates and do the needful.

[Raghav San]

Hi Shilpi,

Thank you for spending time and helping me with a detailed explanation. 

The money that you have earned when you were in the US, have you kept it still in a bank account in the US or this has been brought to India and kept in a foreign currency account in India like EEFC? 

---- [RAGHAV]  Money earned in US is still in US bank and US brokerage Charles Schwab.

Or is this converted into INR and moved to NRE/NRO account?

---- [RAGHAV]  Not Converted

-Raghav

[Shilpi Jain]

If the money is in an overseas bank account, LRS will not be applicable.

[Raghav San]

Shilpi,

Thanks for the confirmation.

-Raghav