Our Bureau

New Delhi, July 27

THE legal decks have been cleared for a taxpayer to set off for tax purposes, his profits and losses in `options' and `futures' (derivative instruments) contracts in stocks, against gains and losses from other sources of income.

The Central Board of Direct Taxes has now framed a new rule by which the country's stock exchanges would be specifically recognised for this purpose so that investors trading `derivative' contracts in these exchanges would enjoy the benefit.

The Finance Ministry has said that a stock exchange making an application for recognition by CBDT in this regard should have the approval of the Securities and Exchange Board of India for allowing members to trade in derivatives. The stock exchange would also have to maintain a complete audit trail of all transactions (in respect of cash and derivative market) for seven years on its system.

The stock exchange additionally has to ensure that transactions once registered in the system couldn't be erased or modified. Also, the particulars of the client (including unique client identity number and Permanent Account Number) should be duly recorded and stored in its database.

Prior to the Union Budget 2005-06, transactions for the purchase or sale of any commodity including stocks and shares were deemed as `speculative transaction' if they were settled otherwise than by actual delivery.

The treatment of transactions as "speculative" or "non-speculative" has a bearing on the set-off of losses, if any, in the subsequent years.

With systemic and technological advancements in stock markets and an excellent audit trail being provided by screen-based trading, the Government in the Union Budget 2005-06 decided to do away with the distinction between speculative and non-speculative transactions - particularly with reference to derivative transactions.

The latest stipulation does not cover derivative contracts in commodities traded in commodity exchanges in the country.

(This article was published in the Business Line print edition dated July 28, 2005)
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