As Indian trader earning from prop firms abroad, How do I stay tax-compliant, avoid red flags

I’m an Indian resident planning to receive trading payouts from funded prop firms (trading with firm capital). I want to stay fully tax-compliant and avoid any scrutiny, bank flags, or compliance issues. Are wallets like Wise, Deel, or Payoneer safe for holding payouts in USD/EUR and withdrawing only what I need for Indian expenses? What payout size/frequency is ideal to stay under the radar but transparent? How should I report this income—business income or under presumptive taxation (44ADA/44AD)? Do I need to register as a freelancer? Any CA suggestions or experiences with this setup would be hugely helpful.

Advice by CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance

With the rise of funded trading platforms globally, many Indian residents are earning performance-based payouts from proprietary (prop) trading firms. While this presents a promising income opportunity, it also demands careful attention to tax and compliance requirements to avoid scrutiny.

1. Nature of income: Not capital gains or salary

Payouts received from prop firms, where the trader uses firm-provided capital, are best classified as business income. Since these are performance-linked earnings from a skill-based service (trading), they do not qualify as capital gains or salary.

Section 44ADA applies to professionals (e.g., technical consultancy), but trading isn’t covered under this.

While presumptive taxation under Section 44AD may be considered in specific scenarios (if receipts are below Rs 3 crore and cash component ≤5%), the preferred route is to treat this under normal business income (ITR-3), especially if expenses are significant or payouts are irregular.

2. Receiving funds abroad

Yes, digital wallets like Wise, Payoneer, and Deel are widely used by Indian professionals to receive foreign income. These platforms are compliant with RBI guidelines as long as:

-The wallet is in your personal name.

-The payouts are documented clearly (e.g., as “trading profits” or “performance fees”).

-Funds are repatriated to India in a reasonable time—ideally within 30–60 days.

Avoid retaining large balances in foreign wallets for extended periods, as this could raise questions under FEMA if not disclosed properly.

3. Ideal payout size & frequency

There is no fixed cap, but consistency and documentation are crucial. Smaller, regular withdrawals, monthly or bi-monthly, aligned with your trading performance can help maintain a clean track record.

Ensure:

> Trading agreements and invoices are in place.

> Payout trails match with wallet and bank statements.

> Full foreign income is disclosed in the tax return, regardless of how much is withdrawn to India.

4. Do you need to register as a freelancer or business?

Formal registration as a freelancer or sole proprietor is not mandatory unless you wish to build a separate business entity. For most individual traders, filing as an individual with business income is sufficient.

5. Tax reporting & compliance

> Use ITR-3 for filing business income.

> Maintain digital records, trading logs, payout reports, and wallet-to-bank reconciliations.

> Report foreign income in Schedule FSI and wallet balances (as applicable) in Schedule FA of the ITR.

A tax audit may be triggered if business income is below 6% of receipts and total income exceeds ₹2.5 lakh.

Conclusion

Earning from international prop firms is fully legitimate for Indian residents when structured correctly. Timely filings, clear documentation, and proper classification of income not only ensure compliance but also build financial credibility. With foreign-sourced digital income under increasing regulatory watch, professional guidance from an experienced CA is your best tool for staying tax-compliant.