I WOULD request you to clarify whether profit/losses on transactions in futures options is to be classified as speculative gain / speculative loss or otherwise according to the India Income Tax Act Carton Of Cigarettes Price. Chandra Ramesh

THE sum and substance of what the NCFM material on futures and options of the NSE (reproduced here) is that the IT act is not clear on whether the profit/loss from derivatives is speculative or not. The income-tax Act does not have any specific provision regarding taxability of profits from derivatives.

The only provisions which have an indirect bearing on derivative transactions are sections 73(1) and 43(5). Section 73(1) provides that any loss, computed in respect of a speculative business carried on by the assessee, shall not be set off except against profits and gains, if any, of speculative business. Section 43(5) of the Act defines a speculative transaction as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. It excludes the following types of transactions from the ambit of speculative transactions:

* A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holding of stocks and shares through price fluctuations;

A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in ordinary course of business as such member Marlboro Cigarette Types. Hence a transaction is speculative, if it is settled otherwise than by actual delivery. The hedging and arbitrage transactions, even though not settled by actual delivery are considered non-speculative. A transaction to be speculative therefore requires that:

The transaction is in commodities, shares, stock or scrips - The transaction is settled otherwise than by actual delivery - The participant has no underlying position - The transaction is not for jobbing/arbitrage Brands Of Cigarettes. In the absence of a specific provision, it is apprehended that the derivatives contracts, particularly the index futures which are essentially cash-settled, may be construed as speculative transactions and, therefore, the losses, if any, will not be eligible for set off against other income of the assessee and will be carried forward and set off against speculative income only up to maximum of eight years. The fact, however, is that derivative contracts are not for purchase/sale of any commodity, stock, share or scrip. Derivatives are a special class of securities under the SC(R)A, 1956 and do not any way resemble any other type of securities such as share, stocks or scrips. Derivative contracts, particularly, index futures are cash-settled, as these cannot be settled otherwise. Derivative contracts are entered into by hedgers, speculators and arbitrageurs. A derivative contract has any of these two parties and hence some of the derivative contracts, not all, have an element of speculation. At least, one of the parties to a derivative contract is a hedger or an arbitrageur. It would, therefore, be unfair to treat derivative transactions as speculative. Otherwise it would be a penalty on hedging which the Securities Laws (Amendment) Act, 1999 seeks to promote. In view of these difficulties in applying the existing provisions, it is desirable to clarify or make special provision for derivatives of securities. Section 43 is relevant in case of contracts where actual delivery is possible, but these are settled otherwise than by actual delivery. This provision cannot be applied to derivatives, particularly index futures, which can be settled only by cash. There cannot be actual delivery. Hence the actual delivery for a contract to be non-speculative cannot be applied to derivatives contracts. Further, a transaction is considered speculative, if a participant enters into a hedging transaction in scrips outside his holdings. It is possible that an investor does not have all the 30 or 50 stocks represented by the index. As a result, an investor's losses or profits out of derivatives transactions, even though they are of hedging nature in real sense, it is apprehended, may be treated as speculative. This is contrary to capital asset pricing model which states that portfolios in any economy move in sympathy with the index although the portfolios do not necessarily contain any security in the index. The index futures are, therefore Marlboro Menthol Lights, used even for hedging the portfolio risk of non-index stocks. the index).

In your reply on Exercising option and selling in the edition of Sunday September22, you say that "you can exercise an option and there is a separate facility available in the NEAT F screen". But what I understand from my broker is this facility available only on the expiration date that is last Thursday of the respective month. Can you expalin this ? You also say that "If you want to sell to close and the series is not liquid enough, an alternative is to sell in the future market to lock in at current levels." But my question is if you do the above you have to pay huge margins on future side if futures are moving up (against you). Please clarify. K. Sankar

In the case of stock options, which are American, they can be exercised on any date. Only in case of European options, you have to wait for the last date of expiration. When taking a short position in the futures market, you have to compare the cost of margins paid with the cost of carry you are able to earn from the futures market Organic Cigarettes. Only if the cost of margin in less does it make sense to short in futures. Else it is not economically viable. - A Special Correspondent
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