ACCOUNTING AND TAXATION

Accounting

Definition: Accounting for financial instruments such as forward contracts, futures, and options.
Details:
- Forward Contracts:
  - Hedging: Amortize premium or discount over the life of the contract. Recognize exchange differences in the Profit & Loss statement.
  - Trading/Speculation: Recognize gains or losses in the Profit & Loss statement.
- Futures:
  - Accounting at Inception: Debit "Initial Margin - Equity Index/Equity Stock Futures Account" for initial margin paid.
  - Daily Settlement: Debit or credit "Mark-to-Market Margin - Equity Index/Equity Stock Futures Account" for daily settlement payments or receipts.
  - Open Interests: Create provisions for anticipated losses on open positions.
- Options:
  - Cash-Settled Options:
    - Buyer/Holder: Debit "Equity Index/Stock Option Premium Account" for premium paid. Recognize premium as an expense in the Profit & Loss account.
    - Seller/Writer: Credit "Equity Index/Stock Option Premium Account" for premium received. Recognize premium as income in the Profit & Loss account.
  - Delivery-Settled Options:
    - Buyer/Holder: Debit relevant equity shares account and credit cash/bank for shares received.
    - Seller/Writer: Credit relevant equity shares account and debit cash/bank for shares delivered.
- Disclosure: Disclose accounting policies, methods, and criteria for recognition and measurement of equity index options and equity stock options.

Definition: Taxation of derivative transactions in securities refers to the tax applicable on transactions involving derivatives such as options and futures contracts.
Details: The tax rates for derivative transactions are as follows:
- Options: 0.125% for the purchaser when the option is exercised, and 0.02% for the seller on the sale of a futures contract in securities.
- Futures: 0.02% for the seller on the sale of a futures contract in securities.
- Physical Settlement: For derivative contracts settled by physical delivery of shares, the STT rate applicable to delivery-based equity transactions (0.1% payable by both the seller and the purchaser) would apply.

Securities Transaction Tax (STT): A tax levied on transactions involving securities, including derivatives.
STT Rates: The rates at which STT is applicable, varying based on the type of transaction (e.g., options, futures, physical settlement).
Taxation of Derivative Gains: Profits from derivatives transactions for Indian investors are taxed as speculative income under the head ‘profits and gains of business or profession’.
Foreign Portfolio Investors (FPIs): Gains or losses arising from derivatives transactions on a recognized stock exchange are taxable as short-term capital gains.

STT is applicable on all sell transactions for both futures and option contracts.
Each futures trade is valued at the actual traded price, and option trade is valued at premium.
In case of voluntary or final exercise of an option contract, STT is levied on the settlement price on the day of exercise if the option contract is in the money.
The clearing member's STT liability is the sum total of STT payable by all trading members clearing under him.