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Chapter 9: Accounting and Taxation

22 Aug 2026 • NISM-Series-8: Equity Derivatives Mock Tests

Accounting and Taxation of Equity Derivatives

Accounting for Forward Contracts (Accounting Standard 11 - AS 11)

In India, the accounting treatment of forward contracts is governed by Accounting Standard 11 (AS 11), which specifies different methods based on the underlying intent of the contract. The two primary categories are hedging contracts and trading/speculation contracts.

1. When Forward Contract is Held for Hedging Purposes

When a forward contract is entered into for hedging purposes, the accounting treatment is structured as follows:

  • Amortisation of Premium or Discount: Any premium or discount on the contract (the difference between the spot rate and the forward rate at the inception of the contract) must be amortised over the life of the contract.
  • Recognition of Exchange Differences: Exchange differences arising on the contract must be recognised in the Profit & Loss (P&L) statement of the financial year in which they occur.
  • Cancellation or Renewal: Any profit or loss arising from the cancellation or renewal of the forward contract must be recognised in the P&L statement of that year.

2. When Forward Contract is Held for Trading or Speculation Purposes

When a forward contract is entered into for trading or speculation, the accounting treatment changes significantly:

  • No Premium/Discount Amortisation: Unlike hedging contracts, no premium or discount is recognised or amortised under this category.
  • Mark-to-Market Gains and Losses: A gain or loss, calculated as the difference between the forward rates for the remaining maturity period, must be recognised in the P&L statement of the period.
  • Cancellation or Renewal: Any profit or loss resulting from the cancellation or renewal of the speculative forward contract is recognised in the P&L statement of the year.

Accounting of Equity Index and Equity Stock Futures

The accounting treatment of exchange-traded equity futures in India is guided by authoritative professional guidance:

  • ICAI Guidance Notes: The Institute of Chartered Accountants of India (ICAI) has issued specific guidance notes on the accounting of index futures contracts.
  • Client Books Perspective: This guidance addresses accounting treatment from the viewpoint of the client (the buyer or seller) entering into these contracts. It focuses largely on how these transactions should be recorded in the books of the client for equity index futures.

Taxation of Derivative Transactions in India

The tax classification of derivative transactions has undergone a major regulatory shift, transitioning from speculative to non-speculative business income.

1. Historical Context (Pre-Financial Year 2005–06)

  • Prior to the Financial Year 2005–06, transactions in derivatives were classified as speculative transactions for the purpose of determining tax liability. Speculative business losses could only be set off against speculative business gains, creating a major tax burden for traders.

2. Modern Tax Regime (Post-Finance Act, 2005)

  • The Non-Speculative Exemption: The Finance Act, 2005 amended Section 43(5) of the Income-tax Act, 1961. This amendment excluded transactions in derivatives carried out on a recognized stock exchange from the definition of speculative transactions.
  • Non-Speculative Income/Loss: Consequently, income or loss from exchange-traded derivative transactions is treated as ordinary business income or loss (non-speculative) rather than speculative income or loss.

3. Provisions for Loss Set-Off and Carry Forward

  • Intraday / Current Year Set-Off: Losses incurred in exchange-traded derivative transactions can be set off against any other business income during the current year, except salary income.
  • Carry Forward Rule: If derivative losses cannot be fully set off during the current financial year, they can be carried forward to subsequent assessment years.
  • Set-Off in Future Years: Once carried forward, these losses can be set off against any non-speculative business income in subsequent years.
  • 8-Year Limit: Such losses are allowed to be carried forward for a maximum period of 8 assessment years.

4. Treatment of Securities Transaction Tax (STT)

  • Deductible Expense: Any Securities Transaction Tax (STT) paid on derivative transactions is fully eligible as a deductible business expense under the provisions of the Income-tax Act, 1961. This means STT can be claimed as a deduction against business income to lower taxable profits.

Summary of Key Differences: Hedging vs. Speculation

Feature Forwards for Hedging Forwards for Trading / Speculation Equity Futures (ICAI Guidance)
AS-11 Premium / Discount Amortised over the contract's life. Not recognised. Treated as per ICAI Guidance Notes.
Exchange Differences / Gains Recognized in P&L of the year. Difference in remaining maturity rates recognized in P&L. Daily mark-to-market and final settlements recorded in client books.
Cancellation / Renewal P&L Recognized in current P&L. Recognized in current P&L. Recognized in current P&L.

Key Terms to Remember

  • AS 11: The accounting standard governing the treatment of effects of changes in foreign exchange rates and forward contracts.
  • Section 43(5): The section of the Income-tax Act, 1961 amended by the Finance Act, 2005 to exclude exchange-traded derivatives from being classified as speculative transactions.
  • Non-Speculative Business Loss: Business loss that can be set off against any other non-speculative business income and carried forward for 8 assessment years.
  • Securities Transaction Tax (STT): A transaction tax levied on stock exchange trades, which is allowed as a business deduction under the Income-tax Act, 1961 for derivative traders.

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NISM-Series-8: Equity Derivatives Mock Tests — FAQs

The NISM Series 8 Equity Derivatives exam consists of 100 multiple-choice questions. Candidates must complete the exam within 2 hours. The questions test knowledge of derivatives markets, futures, options, trading strategies, clearing mechanisms, and risk management. Practicing a NISM 8 mock test with 100 questions helps simulate the real exam environment.

The passing marks for NISM Series 8 Equity Derivatives certification are 60%. This means candidates must score at least 60 out of 100 marks to pass the exam. Preparing with realistic NISM Equity Derivatives mock tests improves accuracy and helps candidates achieve the required passing score.

Yes, the NISM Series 8 exam has negative marking. For every incorrect answer, 25% of the marks assigned to that question are deducted. Since each question carries 1 mark, 0.25 marks are deducted for wrong answers. Practicing with a NISM 8 mock test helps reduce mistakes and manage negative marking.

The NISM Series 8 Equity Derivatives exam fee is approximately ₹1500 (excluding GST). After passing the exam, the certification remains valid for 3 years. Candidates must renew their certification before expiry through the NISM Continuing Professional Education (CPE) program or by re-taking the exam.

To pass NISM Series 8 in the first attempt, candidates should study the official NISM workbook, understand derivatives concepts clearly, and practice regularly with NISM Equity Derivatives mock tests. Attempting multiple full-length mock tests and chapter-wise quizzes improves accuracy, time management, and exam confidence.

The NISM Series 8 syllabus covers topics related to equity derivatives markets. Key topics include basics of derivatives, futures contracts, options contracts, trading strategies, clearing and settlement, risk management, and regulatory framework. Understanding these concepts through practice questions and mock tests helps candidates prepare effectively.

Yes, PassNISM.in provides free NISM Series 8 mock tests for candidates preparing for the Equity Derivatives certification exam. These tests are designed based on the latest NISM exam pattern and help students practice real exam-style questions, case studies, and time-based tests before attempting the final exam.

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