Prop Trading Tax in India — Complete Guide for Funded Traders

How Prop Trading Income Is Classified in India

When you earn payouts from an international prop firm like Lucid Trading, Topstep, or Apex Trader Funding, that income needs to be declared in your Income Tax Return. The classification depends on your trading frequency and whether it's your primary activity.

Business or Professional Income (most common): If you trade regularly through prop firms, your payouts are classified as business income under "Profits and Gains of Business or Profession." This applies to most active prop traders. You'll file ITR-3 and can deduct expenses like evaluation fees, platform costs, internet, and equipment.

Income from Other Sources (occasional traders): If prop trading is a one-off or very occasional activity alongside salaried employment, some CAs may classify it under "Income from Other Sources." However, for regular prop traders, business income is the standard classification.

Note that prop firm payouts are fundamentally different from capital gains on stock trading. You're not buying or selling securities — you're receiving profit-share payments from a foreign entity for your trading services on a simulated account. This makes business/professional income the most appropriate classification.

Tax Rates for Prop Trading Profits

Under the New Tax Regime (default from FY 2025-26), your prop trading income is taxed at these slab rates:

Plus 4% Health & Education Cess on total tax. If your income exceeds ₹50 lakh, additional surcharges apply (10% for ₹50L–₹1Cr, 15% for ₹1Cr–₹2Cr).

Under the new regime, income up to ₹12 lakh is effectively tax-free due to the Section 87A rebate (for salaried individuals, up to ₹12.75 lakh with standard deduction).

What Indian Prop Traders Actually Keep

Let's compare what a prop trader keeps on ₹10 lakh (~$12,000) in annual prop firm profits:

Which ITR Form to File

ITR-3: The standard form for business/professional income. Use this if you want to claim all business deductions (evaluation fees, platform costs, internet, equipment, home office expenses). Most active prop traders should use ITR-3.

ITR-4 (Sugam): For presumptive taxation under Section 44AD/44ADA. If your total turnover is under ₹2 crore (₹3 crore if 95%+ digital transactions), you can declare 6-8% of gross receipts as income and skip maintaining detailed books. This simplifies filing but you can't claim individual deductions.

Practical tip: If you receive ₹5 lakh from prop firms via WorkMarket/Rise (all digital), and opt for Section 44AD with 6% presumptive income, your declared income would be just ₹30,000 — well within the tax-free limit. Consult a CA to determine if this approach is appropriate for your situation.

LRS Compliance — Paying Prop Firm Fees

When you pay evaluation fees to an international prop firm, this falls under the Liberalized Remittance Scheme (LRS). Key rules:

• Annual limit: $250,000 USD per financial year (more than enough for prop firm fees)
• TCS (Tax Collected at Source): 20% TCS on remittances exceeding ₹7 lakh per year under LRS. For a ₹5,400 prop firm fee, TCS is unlikely to apply. But if you pay multiple evaluation fees, keep track.
• Purpose code: Classify the payment as "payment for services" or "education/training services" — your bank will guide you.
• Documentation: Keep invoice from the prop firm, bank remittance receipt, and payment confirmation.

In practice, most Indian prop traders pay via international debit card, Red Dot Pay, or direct crypto, which processes under LRS with proper documentation.

Receiving Payouts — Foreign Income Reporting

When you receive prop firm payouts, the money arrives as foreign income. Here's what you need to know:

• Convert to INR: Report the income in Indian Rupees using the SBI TT buying rate on the date of receipt.
• Schedule FSI: Report foreign income in Schedule FSI (Foreign Source Income) of your ITR.
• Schedule FA: If you hold any foreign accounts (like WorkMarket or Rise accounts), report them in Schedule FA (Foreign Assets).
• FEMA compliance: Receiving payment for services rendered is permitted under FEMA. Keep proper documentation of your prop firm agreement and payout receipts.

Tax Audit Requirements

You may need a tax audit under Section 44AB if:

• Turnover exceeds ₹1 crore: Standard threshold for business income
• Turnover exceeds ₹10 crore (digital): If 95%+ of transactions are through digital channels (WorkMarket, Rise, bank transfers), the higher threshold applies. Most prop traders qualify for this.
• Opted out of presumptive taxation: If you chose Section 44AD/44ADA previously and want to switch to regular computation, audit may be required for the next 5 years.

For most prop traders earning under ₹10 crore through digital channels, a tax audit is unlikely. But consult your CA to be sure.

Deductible Expenses for Prop Traders

If filing ITR-3 with regular computation, you can deduct:

• Prop firm evaluation fees (all attempts, including failed ones)
• Activation fees and monthly platform costs
• Data feed subscriptions (NinjaTrader, TradingView, etc.)
• Internet and electricity (proportional to business use)
• Computer/laptop depreciation
• Trading courses and education
• Home office expenses (if applicable)
• CA fees for tax filing

Practical Tips for Indian Prop Traders

• Maintain a separate bank account for receiving prop firm payouts. This makes tracking and reporting much easier.
• Keep all receipts: Payment confirmations, payout receipts, prop firm agreements, and correspondence.
• Pay advance tax: If your tax liability exceeds ₹10,000 per year, you must pay advance tax in quarterly installments (June 15, September 15, December 15, March 15).
• Consider using WorkMarket (for Lucid) or Rise for payouts — both provide clean paper trails for ITR filing. Report any foreign payment platform accounts in Schedule FA.
• File on time: July 31 deadline for non-audit cases. Missing the deadline means you can't carry forward business losses.