FAQ and Speed Guide on Currency Future Trading in India

FAQ and Speed Guide on Currency Future Trading in India

General

1. Why currency future trading has been introduced in India?

• To upgrade Indian foreign exchange markets to international standards
• To accomplish efficient price discovery in exchange rate
• To provide alternate method to various entities to manage excessive volatility in the currency market

2. Who can trade currency futures at National Stock Exchange?

• Any Indian resident (individual and enterprises) can trade currency future on any stock exchange even without having any exposure to the underlying currency.
• An account needs to be opened with the broker who is a registered member of the currency future segment of the respective exchange.

3. What are the specifications of USD-INR contract?

CLICK HERE “Stock and Index Futures Vs Currency Futures in India” AND “Quick Facts about Currency Futures Trading on NSE”

4. How does clearing and settlement take place?

• Daily settlement – Daily MTM (mark to market) settlement takes place based on T+1. MTM profit and loss are worked out with respect to daily settlement price (DSP), which is calculated on the basis of weighted average price of last half an hour’s trade.
• Final settlement – Final settlement is done in cash mode on T+2. Final settlement price is the reference rate of RBI as on the last trading day of the expiry month.

5. Which clearing house is responsible for clearing and settlement of currency futures on NSE?

NSCCL – National Securities Clearing Corporation Limited

Trading Related

1. What are the transaction charges?

• Stamp Duty = 0.002% of turn over
• SEBI Turnover fees = 0.002% of turn over
• Exchange Transaction charges = presently waived off by NSE up to 30^th September 2008
• Brokerage charges = vary from broker to broker however, a rate of 0.05% could be considered as reasonable for retail investors wanting to trade less than 50K USD
• Service Tax = 12.36% on brokerage charges
• Securities Transaction Tax (STT)= presently not charged
• Total transaction charges = Rs.30 approximately per lot of USD-INR currency future contract based on an approximate value of one contract = 1000 USD = Rs.46,000, presuming INR rate at 46 per USD

2. What are the margins for currency future trading?

Margins comprise of initial margin, extreme loss margin and SPAN margin. Total margin is presently Rs.2100 approximately, based on contract value of Rs.46,000 (1000 USD).

3. What is the treatment of income tax on currency future?

• At present, there is no clarity on this issue from CBDT (Central Board of Direct Taxes).
• It is expected that the treatment of tax on profit and loss from currency future trading would be in line with taxation of equity derivatives. Income from derivatives is treated as income from business.
• It is difficult to predict when CBDT might issue clarification in this matter. However, it is worth noting at this juncture that despite the introduction of F&O (futures and options) way back in the year 2000, CBDT had issued clarification in respect of taxation of profit and loss from F&O transactions only in early January of 2006. Details of the notification are as under.
• CBDT notification number 2/2006 dated 25^th January, 2006 states that transaction in respect of trading in derivatives carried out on recognized stock exchange shall not be deemed to be a speculative transaction.(Refer Section 43(5)(d) of Income Tax Act, 1961)
• Before this notification, the traders had to pay tax at the normal rate of 30% on speculative transactions and the capital losses from cash markets were not allowed to be set off against derivative transactions. After the introduction of this clause, it is possible for traders to get set off on profit and loss against any other business income.