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IN the article Income from Derivative trading and taxability published in `Business Line' dated 22.12.02, it is mentioned that future/options transaction may be treated as speculative. However, can you please tell how the Income -Tax Department is treating these gains or losses - whether speculative or short-term capital gain or losses? — Mahender Kumar

Derivatives' trading in India is still in its nascent stage. No specific provision is applicable as on date, but there are provisions that have indirect bearing on such derivative transactions. Derivative trading by individuals is generally construed as speculative business.

Section 43(5) defines `speculative transaction' as those which are periodically or ultimately settled otherwise than by actual delivery or transfer. The difference between hedging and speculation was cleared by CBDT in its circular dated September 19, 1960. It states that `where the forward transactions are entered into by an investor to guard against loss his holdings of shares through price fluctuations', then such a transaction will be treated as hedging and not as speculation.

If the transaction was undertaken to hedge - to protect a portfolio/position then the gain or loss will need to be offset. This gain/loss will coincide with the gain or loss of the actual positions being protected.

All transactions apart from hedging in index & equity futures, options will be treated as speculative transactions as only cash-settlement is possible.This exception for hedging is applicable only to the extent of the stock in hand. Suppose you have 100 shares of Infosys, and 2 contracts of Infosys call. As the lot size of Infosys is 100 shares, the gains from one contract will be treated as hedging whereas the gains from the other contract will be treated as `speculative gains'. Though there is hedging and speculative treatments in equity derivatives, index derivatives will be treated only as `speculative gains/losses' as the underlying basket of shares is not available with the individual.

Section 73(1) states that such a loss shall not set off except against profits from any other speculative business.If speculation profits are insufficient, such losses can be carried forward for eight subsequent years. These losses from previous year will be set off against the profits for the year before setting off any loss for that year from other sources.

I have bought in April 03 two calls of Satyam with expiry date 24/04/2003 (Seetable). However, I did not square up the calls before the expiry. How is the accounting done in my ledger by broker for the above transactions? — JP Surapuraju.

You have to transact these deals through your trading member. On the purchase date, your account with the broker would be debited.

The amount to be debited is calculated as

Number of contracts X lot size X Premium

So on 9/4/2003, your account will be debited by Rs 30,900 (1 x 1200 x 25.75) and on 10/4/2003 debited by Rs 12,960 (1 x 1200 x 10.8)

On 24/03/2003, the spot Satyam closed at Rs 160. The April 150 calls that you possess ended in-the-money. All the In-the-money options are automatically exercised and cash settled on the expiry date. Therefore, the amount due to you will be computed as Number of contracts X lot size X (Strike-Spot)

This amount of Rs 24,000 (2 x 1200 x (160-150)) will be credited to your account.

You have to factor in the brokerage paid to your broker. The computations above have been made without taking that into consideration. Depending upon your brokerage policy, the amount will be debited from your account.Since you're the holder of calls, no margin - initial or maintenance margin is levied. If you have sold these calls (call writer) then you have to pay adequate margin to your broker, who in turn, would maintain the margin with the stock exchange.

If you have any queries relating to the futures/options markets and strategies that can be used in these markets, please mail them to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002 or email them to vaidy@thehindu.co.in with a mention of futures/options in the subject line of the mail.

C. Raja Rajeshwari

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