Futures Contract

A futures contract obliges both the buyer and the seller, unlike an option where only the buyer has a choice. You agree today on a price for an underlying such as the Nifty 50, Bank Nifty, a single stock, or a commodity, to be settled on a future expiry date.

How it works

Futures are standardised exchange-traded contracts. To open a position you deposit an initial margin, made up of SPAN margin (the exchange's risk-based estimate) plus an exposure margin buffer. Each day your position is marked to market: gains are credited and losses debited to your account, and if your balance falls below the maintenance level you get a margin call. Indian index and stock futures are cash-settled, so only the profit or loss is exchanged.

In India

Futures trade on the NSE and BSE in fixed lot sizes, with three live monthly contracts (near, next, and far month) at any time. SEBI has raised minimum contract values and the exchanges periodically revise lot sizes. Because futures carry built-in leverage, a small price move produces an outsized gain or loss relative to the margin posted.

Tax

Like options, futures income is non-speculative business income under Section 43(5), added to your total income and taxed at slab rates. STT applies on the sell side of futures trades and is a deductible business expense.

Why it matters

Futures are powerful for hedging. An exporter, a fund manager, or an investor holding a large equity portfolio can lock in prices or offset downside risk. Traders also use them to speculate on direction with leverage. The flip side is symmetric, unlimited risk: because you are obligated to settle, losses are not capped at a premium the way an option buyer's are. Daily mark-to-market means losses hit your account immediately, so position sizing and stop-losses matter far more here than in cash equity.