Cash Market vs F&O Trading in India: Lot Sizes, Margins, Settlement and Tax

What the cash market actually is in India today

The cash market, also called the equity or spot segment, is where you buy and sell shares for full value and take genuine ownership. When you buy 100 shares of Reliance, you pay the entire amount, the shares land in your demat account, and you become a part-owner of the company with rights to dividends and voting. There is no expiry, no rollover, and no daily mark-to-market. You can hold for a day or a decade.

The settlement cycle is the part most older guides get wrong. India is no longer on T+2. The NSE and BSE moved equities to a T+1 settlement cycle in a phased rollout that completed in January 2023, so shares and funds reflect in your account one business day after the trade. SEBI has since launched an optional T+0 (same-day) settlement cycle for a defined list of stocks, running in parallel with T+1. So if you read a Reliance example that says delivery happens in two business days, treat it as outdated.

Because you pay full value, the cash market is naturally lower-leverage and lower-stress than F&O. Your maximum loss on a long delivery trade is the money you put in, and that money is only at risk while you hold. This is why the cash market suits investors building long-term positions and beginners learning how price, volume and corporate events behave before they ever touch a derivative.

What F&O is, and why the lot size matters so much

Futures and Options (F&O) are derivatives. Their value is derived from an underlying such as the Nifty 50 index, the Bank Nifty index, or a single stock like HDFC Bank. A futures contract is an agreement to buy or sell the underlying at a set price on a set expiry date. An option gives the buyer the right, but not the obligation, to buy (call) or sell (put) at a strike price, in exchange for paying a premium.

You never trade one share of an index. Everything trades in fixed lot sizes set by the exchange. As of the latest SEBI revision the common lot sizes are: Nifty 50 = 65, Bank Nifty = 30, FinNifty = 60, Midcap Nifty = 120, Sensex = 20 and Bankex = 30. The lot size is the multiplier that turns a small-looking point move into a large rupee amount, so you must do the math before you click buy.

SEBI also raised the minimum contract value for index derivatives to around Rs 15 lakh, which is why a single Nifty lot is now a serious position rather than a casual punt. Understanding this multiplier is the single most important thing a new F&O trader can learn, because it is the reason leverage feels harmless until the day it does not.

Worked example: buying one Nifty futures lot (illustrative)

Assume Nifty futures are trading at 24,000 and you buy one lot (65 units). The notional contract value is 24,000 multiplied by 65, which is Rs 15,60,000. You do not pay this. You post margin. Exchange margin for Nifty futures is broadly in the Rs 1.4 lakh to Rs 1.6 lakh range (SPAN plus exposure margin combined), and it moves with volatility. For this example we will use roughly Rs 1,50,000. That is about 10.4x leverage on your money.

Now suppose Nifty rises 200 points to 24,200 and you square off. Your gross profit is 200 multiplied by 75, which is Rs 15,000. On Rs 1,70,000 of margin that is roughly an 8.8 percent return from a move of just 0.83 percent in the index. That is leverage working for you. But flip it: if Nifty instead falls 200 points to 23,800, you lose Rs 15,000, an 8.8 percent dent in your margin from a tiny index move. Same multiplier, opposite direction.

Costs eat into the futures number more than people expect. On index futures, STT applies on the sell side, plus exchange transaction charges, SEBI fees, stamp duty on the buy side, GST on (brokerage plus transaction charges), and brokerage if your broker charges per order. Realistic round-trip costs on one Nifty futures lot run to a few hundred rupees, so a Rs 15,000 gross gain might net somewhere around Rs 14,500 to Rs 14,700. These figures are illustrative and change with price, volatility and your broker; nothing here is a guaranteed return.

A second example: an option buyer on Bank Nifty (illustrative)

Options change the risk shape. Assume Bank Nifty is at 52,000 and you buy one lot of the 52,000 call at a premium of Rs 400. The lot size is 30, so your total outlay is 400 multiplied by 15, which is Rs 6,000. That Rs 6,000 is also your maximum possible loss, because an option buyer can never lose more than the premium paid. This capped downside is why many new traders gravitate to buying options.

If Bank Nifty rallies and the call premium rises to Rs 700, you can sell to close for 700 multiplied by 15, which is Rs 10,500. Your gross profit is Rs 4,500 on a Rs 6,000 outlay, before costs. If instead the index goes sideways or falls and the option expires worthless, you lose the full Rs 6,000. The trap is time decay: an out-of-the-money option loses value every day even if the index does not move against you, which is why the majority of option-buying attempts that are simply held to expiry tend to lose. Numbers here are illustrative only.

Expiry, settlement and physical delivery you must not ignore

Cash-market shares never expire. F&O contracts do. Nifty has weekly option expiries plus a monthly expiry, while most other contracts settle monthly; exchanges periodically rationalise which indices get weekly expiries, so always confirm the current schedule on the NSE or BSE site. On expiry day, your position is closed at the settlement price if you have not already squared off.

Here is the part that catches newcomers. Index F&O (Nifty, Bank Nifty) is cash settled: you simply receive or pay the rupee difference, no shares change hands. But single-stock F&O is physically settled. If you are holding an in-the-money stock future or option at expiry and you do not square it off, it converts into an obligation to deliver or take delivery of the actual shares, which can mean a sudden, large cash or stock requirement and steep penalties. Many brokers auto-square positions near expiry, but you should never rely on that.

• Index options and futures: cash settled, no delivery risk, just rupee difference.
• Stock options and futures: physically settled, can convert to real share delivery if left to expire in-the-money.
• Weekly Nifty options expire fast, so time decay is brutal in the last two days.
• Always know your exact expiry date and your broker's auto-square-off cut-off time.

How they are taxed: the difference that surprises people

This is where the old version of this page was simply out of date, and it matters at filing time. Cash-market delivery gains are capital gains. After the Budget 2024 changes effective 23 July 2024, Short-Term Capital Gains (STCG) on listed equity held under 12 months are taxed at 20 percent (raised from 15 percent). Long-Term Capital Gains (LTCG) on equity held 12 months or more are taxed at 12.5 percent on gains above Rs 1.25 lakh per financial year (the exemption was raised from Rs 1 lakh and the rate changed from 10 percent). A 4 percent health and education cess applies on top, and surcharge can apply at higher incomes.

F&O is completely different. It is treated as business income, not capital gains. There is no STCG or LTCG concept and no Rs 1.25 lakh exemption. Your net F&O profit is added to your total income and taxed at your applicable slab rate. The upside is that you can deduct genuine business expenses such as brokerage, exchange charges, internet, and advisory costs, and you can set off and carry forward losses under business-income rules. Because turnover in F&O is calculated in a specific way, many active F&O traders fall under tax-audit requirements, so keeping clean records is not optional.

On every trade you also pay Securities Transaction Tax (STT), and the rates differ by segment. As a guide, delivery equity STT is 0.1 percent on both buy and sell, intraday equity STT is 0.025 percent on the sell side, options STT is 0.1 percent on the sell side of the premium, and futures STT is 0.02 percent on the sell side. Always confirm current rates on the official source, since these are periodically revised.

Margin, mark-to-market and the daily reality of futures

In the cash market, once you have paid for delivery shares, nothing else is debited day to day. Futures are different because of daily mark-to-market (MTM). At the end of each session your futures position is revalued to the closing price, and the gain or loss is credited or debited from your account that day. If the position moves against you and your margin falls below the required level, you face a margin call and must add funds, or the broker can square off your position, sometimes at the worst possible moment.

Margin itself is not fixed. It is made of SPAN margin (which rises with volatility) plus exposure margin, and exchanges can raise margins around events, expiry, or turbulent markets. The Rs 1.7 lakh figure for a Nifty lot used earlier can climb meaningfully when volatility spikes, so a position that was comfortable can suddenly demand more cash. This is why experienced traders keep a buffer well above the bare minimum margin.

1. Compute notional value (price multiplied by lot size) so you know the true size of your bet.
2. Check the live margin requirement in your broker terminal before entering, not a textbook number.
3. Keep spare funds for MTM debits and possible margin hikes around expiry or news.
4. Decide your exit and stop-loss in rupees, using the lot-size multiplier, before you enter.

Which one should you actually use?

There is no single right answer, only a right fit. If your goal is long-term wealth, ownership, dividends and lower stress, the cash market is the natural home. You can hold quality businesses for years, ride compounding, and never worry about expiry, margin calls or MTM debits. Most people building a portfolio should keep the bulk of their capital here.

F&O earns its place in two roles. The first is hedging: an investor with a large banking-stock portfolio can buy Bank Nifty puts to cushion a sector fall, paying a known premium for protection. The second is defined, disciplined speculation on short-term moves, where leverage and the ability to profit on both up and down moves are genuinely useful, provided you respect position sizing and stops. F&O is a tool, not a shortcut, and treating it as a lottery is the fastest way to lose your capital.

• Choose cash if you want ownership, dividends, long holding periods and lower risk.
• Choose F&O for hedging an existing portfolio or for short-term, well-sized directional or volatility trades.
• Beginners should master the cash market first; leverage magnifies mistakes, not just wins.
• Never put F&O margin money you cannot afford to lose into a single undiversified bet.

Common mistakes that quietly drain accounts

The most expensive F&O mistake is ignoring the lot-size multiplier and over-sizing. A trader who thinks in points rather than rupees buys three Nifty lots, feels a 60-point move is small, and only later realises it just cost Rs 13,500. The second is letting a stock F&O position run into physical settlement by accident. The third is treating option buying as cheap because the premium is small, while ignoring time decay that erodes it daily.

In the cash market the mistakes are slower but real: no diversification, buying on tips without research, and panic-selling quality holdings on temporary dips. Both segments punish the same root cause, which is trading without a written plan, position sizing, and a pre-decided exit. Discipline, not prediction, is what separates traders who last from those who do not.

Sources and further reading

For authoritative contract specifications, lot sizes, margins and settlement rules, refer to NSE India, SEBI, and the Income Tax Department. Lot sizes, margins, STT and tax rates are revised from time to time, so always confirm the current numbers on the official source before you trade. All figures in this guide are illustrative and are not a promise of returns.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, SEBI (Securities and Exchange Board of India) and Income Tax Department. Always confirm current rules, rates and contract specifications on the official source before you trade.