Accounting :
- Forward Contract Accounting:
- Hedging: Amortize the premium/discount over the contract’s life; recognize exchange differences in the P&L; P&L recognized for contract cancellation/renewal.
- Trading/Speculation: No recognition of premium/discount; recognize gain/loss based on changes in the forward rate at year-end in P&L; P&L recognized for contract cancellation/renewal.
- Equity Index/Stock Futures:
- Initial Margin: Paid margin is debited to the “Initial Margin Account”; excess margin disclosed under “Current Assets”. Bank guarantees or securities need note disclosure.
- Daily Settlement: Payments for Mark-to-Market (MTM) margin are credited/debited to “Mark-to-Market Margin Account”; excess margin disclosed under “Current Assets”.
- Final Settlement: Profit/loss recognized in P&L; the initial margin is released.
- Accounting for Open Interests:
- Debit/credit balances in the MTM margin account recognized based on the market movement; provisions for anticipated losses are created.
- Loss provision is shown as a current liability, while net profit (credit balance) is ignored.
- Default and Close-Out:
- If a client defaults, the contract is closed out, with adjustments made against the initial margin. Profits/losses are calculated and recognized.
- Disclosure Requirements:
- Bank guarantees, securities values, and open futures contracts should be disclosed at year-end.
- Details of futures contracts, including long/short positions and units, must be disclosed.
- Equity Index/Stock Options:
- Initial Margin: Paid by the seller; debited to “Equity Index/Stock Option Margin Account”.
- Premium: Buyer pays premium debited to “Equity Index/Stock Option Premium Account”, while seller receives premium credited to the same.
- MTM Margin: Payments/receipts of margin recorded similarly to futures contracts.
- Provision for Loss on Options:
- Provisions for loss are made for the buyer’s paid premium exceeding market value, and for the seller’s received premium exceeding market value at year-end.
- Adjust provisions based on open options at the balance sheet date.
- Settlement and Squaring-Off:
- For exercised options, profits and losses are recognized based on the final settlement price. Margin paid on settlement is released.
- Squaring-off transactions result in a profit/loss, which is adjusted in the P&L.
- Delivery-Settled Options:
- For Call Options: Buyer receives shares and credits cash, seller delivers shares and debits cash.
- For Put Options: Buyer delivers shares and debits cash, seller receives shares and credits cash.
- Disclosure for Options:
- Enterprises must disclose policies, recognition criteria, and margin-related details in financial statements for options, including bank guarantees and securities.
Taxation of derivative transaction in securities :
- Tax Treatment of Derivative Transactions:
- Gains/losses from derivative transactions on exchanges are taxed under “Profits and Gains from Business or Profession.”
- Classified as either non-speculative or speculative income.
- Speculative losses can only be set off against speculative income.
- Pre-2005-06 Tax Treatment:
- Prior to FY 2005-06, derivative transactions were considered speculative for tax purposes, limiting loss set-offs.
- Losses could only be offset against other speculative income, leading to higher taxes.
- Post-2005-06 Tax Treatment:
- Finance Act, 2005 amended Section 43(5) to exclude derivative transactions on recognized stock exchanges from being classified as speculative.
- Losses on such transactions can be set off against any non-salary income and carried forward for 8 years.
- Taxation for Foreign Portfolio Investors (FPIs):
- For FPIs, gains/losses from derivatives on recognized exchanges are taxed as capital gains (typically short-term).
- FPIs can opt for either normal or presumptive taxation (under Section 44AD), where gains are taxed at 6% of turnover.
- Tax Audit Requirements:
- Mandatory if turnover exceeds Rs 10 Crore (Section 44AB(a)).
- Not required if turnover is below Rs 2 Crore and profits are ≥ 6% under Section 44AD.
- Between Rs 2 Crore and Rs 10 Crore, tax audit may be avoided if more than 95% transactions are digital.
- Securities Transaction Tax (STT):
- STT is levied on securities transactions on Indian stock exchanges (equity, derivatives, mutual funds).
- STT rates for derivatives: 0.10% on option sales (seller), 0.125% if exercised (purchaser), and 0.02% on futures sales (seller).
- For physical delivery of shares in derivatives, STT is similar to equity transactions (0.1% for both seller and purchaser).
- STT Collection and Calculation:
- STT is collected by exchanges based on the actual traded price for futures and the premium for options.
- Clearing members calculate STT based on trading members’ aggregated liability.