Is trading legal in India?

Mr. Ashish Chauhan, the CEO of National Stock Exchange (NSE) revealed that its investor base has crossed 12 crore in September, 2025. This huge number shows that the investors are not only becoming aware but are also looking to actively trade in the market.

As the interest in trading grows in the country, it becomes important to understand how the system of trading works, and the practices that keep it fair and secure. In this article, let’s walk through what makes trading legal in India, the key regulations governing it, and the proper trading process one must follow.

Is trading legal in India?

Like any other financial activity, trading also has to be carried out within a framework of rules and regulations laid down by the authorities. It helps in making the market a more transparent, fair, and investor-friendly place.
By understanding what makes trading legal, you can make sound financial decisions and avoid any unwanted risks.

What does “legal trading” mean in India?

The term ‘legal trading’ means the buying and selling of financial instruments such as shares, derivatives, and commodities on an authorised stock exchange, and in compliance with SEBI regulations.

For a trade to be considered legal in India, it has to be:

• Executed through a broker registered with SEBI.
• Done through authorised exchanges such as NSE, BSE, or MCX.
• Comply with FEMA rules.

Major regulatory bodies & laws

Trading in India is regulated by strict laws and government bodies to ensure fair market practices and protect the interests of the investors. 

Several key regulators ensure that trading in India remains fair, transparent, and investor-friendly:

SEBI
It is the primary regulatory body of the Indian securities market. It was established in 1992 with the aim of protecting the investors, stopping fraudulent practices, and ensuring fairness in the market.

The functions of SEBI are:

• Investor protection by enforcing strict laws
• Prohibition of insider trading
• Development of markets and financial instruments
• Registration and supervision of brokers and other market participants
• Promotion of financial literacy by organising campaigns and events

For example, SEBI has mandated the brokers to maintain time-stamping of contracts to ensure fair execution and transparent pricing for the investors.

RBI
The Reserve Bank of India (RBI) governs the trading by regulating the foreign exchange market. It monitors international money transfers and prevents any unauthorised transactions. It also decides the currency pairs available for legal trading.

Ministry of Finance
The Ministry of Finance is a government body that makes fiscal policy and looks after the development of the economy. Under it, the Department of Revenue formulates the tax policies that directly affect trading activities, such as the securities transaction tax (STT).

IT Department
The taxes on trading are governed by the Income Tax (IT) Department. The profits from equity trading are subject to capital-gains tax, while intraday and derivatives profits are treated as business income.

The considerable acts regarding trading are:

Securities Contracts Regulation Act, 1956: It regulates how securities are traded on exchanges, preventing undesirable transactions.

Depositories Act, 1996: This act was made to replace the need for physical shares. It allows securities to be held digitally in a Demat account.

FEMA, 1999: It was made to oversee foreign exchange transactions. It makes sure there are no unauthorised foreign exchange dealings.

How to legally start trading in India (step-by-step)

To start trading in India legally, the given steps are to be followed:

Step 1: Select a Broker registered with SEBI
You can’t directly trade in stocks. You need to have a SEBI-registered broker.

Step 2: Open a Trading and Demat Account

After choosing a broker, you have to open a demat and a trading account with them. The demat account safely holds the securities digitally, while the trading account will be used to buy or sell financial instruments online.

Step 3: Complete Your KYC Process

As per SEBI’s rules, every investor must complete the Know Your Customer (KYC) verification. For this, you’ll need to submit your:

• PAN Card
• Aadhaar Card
• Bank account details
• Signature and income proof (for derivatives)

Step 4: Link Your Bank Account

The next step is to link your bank account with the demat account and the trading account. The linked bank account is used for adding or withdrawing funds.

Step 5: Start Trading

After completing the setup, you are ready to trade. By following the SEBI and exchange rules, you can avoid unnecessary risks and penalties and trade effectively.

Stock & equity trading in India

When you buy the stock (equity shares) of a company, it grants you partial ownership. Dealing in equity is the most popular method of trading in India.

Types of equity trading:

1. Intraday Trading: Buying or selling of securities within a day (same trading gains) is known as intraday trading. The profits from intraday trading are treated as business income.
2. Delivery Trading: Buying and holding securities for a long term for capital appreciation and dividends. Capital-gains tax is to be paid on the profit made by holding securities.

Derivatives / futures & options trading

Derivatives are financial instruments that derive their value from an underlying asset. A good understanding of the market and prior trading experience are essential before entering derivatives trading.

In India, the following derivative trading options are available:

• Stock Futures/Options – based on the individual shares of a company.
• Index Futures/Options – are based on different indices such as Nifty IT or Nifty Smallcap 100.
• Commodity Derivatives – are based on commodities like gold, silver, iron, and crude oil.

Trading in derivatives is legal in India, but strict margin requirements have to be followed. Beginners should trade with caution as derivatives are very volatile and carry high risk.

Why offshore forex / binary platforms are illegal

You must have come across forex/binary trading platforms promising astounding returns. They seem lucrative, but are actually illegal because of the reasons given below:

Lack of Regulation: They fall outside the control of regulatory bodies like RBI or SEBI

No Investor Protection: No legal course of action in case the investors’ funds are lost 

Violation of FEMA: Sending money to foreign forex or binary trading platforms is considered a violation.

You can still trade in foreign currencies, but under restrictions. The RBI allows currency trading only on Indian exchanges and only for pairs involving the Indian Rupee (INR). The four currencies that can be paired with the INR are :

• USD/INR
• EUR/INR
• GBP/INR
• JPY/INR

Risks, penalties & judicial precedents

The act of engaging in prohibited or unregulated activities is very risky and punishable.

Some of these activities are:

Insider Trading: Using any non-public information to take an unfair advantage in the securities market. For example, on 15 October, 2025, eight individuals have been accused by SEBI for using confidential information about Indian Energy Exchange (IEX) shares to make illegal gains of ₹173 crore.

Offshore Forex Trading: Trading on foreign forex or binary platforms is banned by FEMA, and doing so is considered a violation
Unfair Trade Practices: Manipulation of the market by rigging the prices to create false trends and profit from those movements.

If someone is found guilty, they are penalised in the following manner:

• Insider Trading
  • Minimum fine of ₹5 lakh, and up to ₹25 crore or 3x the profit value, whichever is higher
  • Imprisonment up to five years
  • Permanent ban on trading
• Fraudulent Trade Practices
  • Minimum fine of ₹5 lakh, and up to ₹25 crore or 3x the profit value, whichever is higher
  • Imprisonment based on the level of offence
  • Bans from the market for a specified or indefinite period
• Violation of FEMA
  • Fine of three times the amount of the violation, and daily fines of ₹5,000 if continued
  • Imprisonment of up to ten years 
  • Permanent disqualification from forex transactions

Recent regulatory changes & proposed updates

Over the years, the regulatory bodies have been working to make trading smoother, faster, and transparent. Some of the recent changes and proposed updates are:

1. T+1 Settlement Cycle: A T+1 settlement system allows for the delivery of securities within one working day of the execution of a trade. It was fully implemented in India on January 27, 2023.

2. SCORES: The SEBI Complaint Redressal System (SCORES) 2.0 version was launched in 2024. It has new auto-escalation and auto-routing features that have helped in reducing the complaint redressal time to 21 days.

3. UPI Limit for IPOs: The UPI limit for IPO applications has been increased from ₹2 lakh to ₹5 lakh. It has become more convenient for a wider category of investors, such as the small High-Net-Worth Individuals (HNIs), to apply for IPOs.

4. AI-based Surveillance: SEBI, with the exchanges, is deploying AI tools for market surveillance, which helps in early fraud detection and investor protection. It is helping the authorities to move from a reactive state to a predictive oversight.

5. Access to NDS-OM: SEBI is considering giving the access of the Negotiated Dealing System-Order Matching (NDS-OM) to brokers. It is usually used for dealing in government securities owned in the secondary market. Granting the brokers access to it helps in improving retail investor participation.

Comparative: how India’s rules differ from other countries

Let’s compare the trading scenario of India with the United States of America (USA) and Europe:

Aspect	India	USA	Europe
Regulatory Body	Securities and Exchange Board of India (SEBI)	Securities and Exchange Commission (SEC)	European Securities and Markets Authority (ESMA)
Settlement Cycle	T+1 days	T+1 days	T+2 days
Currency Pairs	Only INR-based pairs are allowed	All major pairs are allowed	All major pairs are allowed
Binary Options	Completely prohibited	Legal but highly regulated	Completely prohibited

Conclusion

Trading in India is completely legal as long as it is done through SEBI-registered brokers on an authorised exchange. Several authorities and laws work to make the markets more transparent, efficient, and to protect the investor.

Practices such as unauthorised foreign exchange, market manipulation, and insider trading are illegal- they carry fines and punishments.

Regulatory changes are taking place to make trading a more efficient, smoother, and fair activity for all the market participants. One must trade responsibly, following all the rules and regulations, in order to achieve long-term success in the market.

FAQ‘s