Tax benefits for traders as CBDT approves NSE's commodity derivatives

Exchange gets 'Recognised Association' status, due to which participants can set off losses in commodity derivatives against business gains

The National Stock Exchange of India Ltd (NSE) been approved as a ‘Recognized Association’ by the Central Board of Direct Taxes (CBDT) for commodity derivatives trading, joining all other exchanges offering the product. In fact, the other bourses had long ago been accorded this status, which allows traders to set off losses in commodity derivatives against their business gains.

However, NSE has not indicated when the recognition for the purpose of tax benefit will be effective and has only said that the status is subject to the fulfillment of specified conditions set by CBDT. The exchange's commodity derivatives segment was launched on October 12, 2018.

In a press note released today, NSE said, “This approval will benefit traders in relation to trading in the commodity derivatives segment of NSE, as the derivative income shall be treated as business income. Furthermore, all the benefits/deductions under the Income Tax provisions relating to business income, including carried-forward and set-off of losses shall also be available.”

The approval is required under section 43(5)(e) of the Income Tax Act, 1961, which states that transactions in relation to commodity derivatives shall be taxed as business income, provided they have been executed on a Recognized Association. The recognition is subject to approval by the Central Board of Direct Taxes (CBDT) and fulfilling specified conditions. Although the exchange has not mentioned what these conditions are, it said, “CBDT, pursuant to the application made by NSE, has observed that NSE has complied with all the necessary conditions and thus accorded the approval.”

Earlier the CBDT refused to accord this status following some issues raised by Sebi against the exchange, leaving market participants confused about the set of facilities mentioned above.