Equity vs Derivatives in India: Ownership, Leverage and Tax Explained

What Equity Actually Is

Equity means a share of ownership in a listed company. When you buy 100 shares of Reliance Industries on the NSE, you own a tiny slice of the business. There is no expiry date. You can hold those shares for a day, a year or a decade. As long as you do not sell, you remain a part owner and you are entitled to dividends the company declares and to any bonus or rights issues.

Equity trades settle on a T+1 basis in India, meaning the shares land in your demat account one working day after you buy. When you take delivery, the full purchase value must be paid. There is no built-in leverage on delivery trades, so your maximum loss is limited to the money you put in. A stock cannot go below zero, so if you buy without borrowing, you cannot lose more than you invested.

Because equity has no expiry and no daily mark-to-market cash drain, it suits investors who want to compound wealth over years. The trade-off is that you tie up the full capital. Buying Rs 5 lakh of shares needs Rs 5 lakh in hand, unlike a derivative where a fraction of that controls the same exposure.

What Derivatives Actually Are

A derivative is a contract whose value is derived from an underlying asset such as a stock, an index like Nifty or Bank Nifty, or a commodity. The two main types traded by retail Indians are futures and options. You never own the underlying. You own a contract that profits or loses based on how the underlying moves before the contract expires.

Every Indian derivative trades in a fixed bundle called a lot. You cannot buy a single Nifty unit the way you buy a single share. As of the latest SEBI and NSE revisions, the Nifty lot size is 65, Bank Nifty is 30, FinNifty is 60 and Sensex is 20. This is the single most important number to understand, and it is exactly where the old version of this page went wrong by treating the index level as a rupee price.

Futures obligate both sides to settle at a fixed level on expiry, and they are marked to market every single day, so cash moves in or out of your account daily. Options give the buyer the right, but not the obligation, to buy (call) or sell (put) at a chosen strike. The option buyer pays a premium and can lose at most that premium. The option seller collects the premium but takes on large, sometimes unlimited, risk.

Equity vs Derivatives At A Glance

Worked Example: Buying Reliance Equity

Suppose you buy 100 shares of Reliance Industries at Rs 2,950 for delivery. Your outlay is Rs 2,95,000, and you must pay the full amount. These figures are illustrative and not a forecast. Say the stock rises to Rs 3,150 and you sell after eight months. Your gross gain is (3,150 minus 2,950) times 100, which is Rs 20,000.

Costs apply on both legs. Delivery STT is 0.1% on each side, so roughly Rs 295 on the buy and Rs 315 on the sell. Add a few rupees of exchange transaction charges, SEBI fees, GST and stamp duty, plus brokerage (many discount brokers charge zero brokerage on delivery). Your all-in cost is in the region of Rs 700 to Rs 900, leaving a net gain near Rs 19,100 to Rs 19,300.

Because you held under 12 months, this is a short-term capital gain taxed at 20%. Tax of about Rs 3,800 to Rs 3,860 applies (plus applicable cess), leaving you roughly Rs 15,300. Had you held the same shares more than 12 months, it would be a long-term gain, and only the amount above Rs 1.25 lakh in the year would be taxed, at 12.5%. On a Rs 20,000 long-term gain that falls under the Rs 1.25 lakh annual exemption, you would pay zero long-term capital gains tax.

Worked Example: One Nifty Futures Lot

Now the derivative side, done correctly. Assume Nifty futures are quoting at 23,400 and the lot size is 65. These are illustrative numbers. Your notional exposure on one lot is 23,400 times 65, which is Rs 15,21,000. You do not pay all of that. You post a margin, which for index futures is often in the range of Rs 1.4 lakh to Rs 1.7 lakh depending on volatility and SPAN plus exposure requirements set by the exchange.

Say you go long and Nifty futures rise to 23,650, a gain of 250 points. Your profit is 250 times 75, which is Rs 18,750 on one lot, before costs. If instead the level dropped to 23,150, you would lose 250 points times 75, which is Rs 18,750. Notice how a roughly 1% move in the index produced a swing of nearly 12% on a Rs 1.6 lakh margin. That magnification is leverage, and it cuts both ways.

• Notional value: 23,400 x 65 = Rs 15,21,000
• Margin posted (illustrative): about Rs 1,40,000 to Rs 1,75,000
• 250-point favourable move: 250 x 65 = Rs 16,250 gross profit
• 250-point adverse move: 250 x 65 = Rs 16,250 gross loss
• Futures STT is charged at 0.05% on the sell side of the contract turnover, not on the points

This profit is business income, not capital gains. It is added to your other income and taxed at your slab rate. There is no special 12.5% or 20% rate for F&O. Futures are also marked to market daily, so if the trade moves against you, the loss is debited from your account that evening, and you may get a margin call to top up before the next session.

Worked Example: A Bank Nifty Option Buy

Options change the risk shape. Suppose Bank Nifty is near 51,000 and you buy one 51,200 call option at a premium of Rs 180. The Bank Nifty lot size is 30, so your total premium outlay is 180 times 15, which is Rs 2,700. That Rs 2,700 is the most you can lose as a buyer, no matter how far Bank Nifty falls. These numbers are illustrative.

If Bank Nifty rallies and the call premium rises to Rs 320 before expiry, you can sell to close. Your gross gain is (320 minus 180) times 15, which is Rs 2,100. If instead the index stays flat or falls, the premium decays toward zero and you can lose the entire Rs 2,700. One important cost trap: when you sell an option, STT is levied on the full premium value of the sale, not just on profit, so factor that in on every exit.

Expiry, Lot Sizes And The 2024-2025 SEBI Changes

Indian index derivatives expire weekly and monthly. To curb speculative churn and retail losses, SEBI has limited each exchange to one weekly expiry contract. On the NSE the surviving weekly is Nifty, and on the BSE it is Sensex. Bank Nifty, FinNifty and others now expire only monthly. The monthly contract settles on the last specified weekday of the month, and weekly contracts settle on their fixed weekday.

SEBI also raised the minimum contract value, which pushed lot sizes up. Larger lots mean a single Nifty or Bank Nifty position carries more notional value and demands more margin than it did a couple of years ago. The regulator additionally tightened intraday position limits and removed certain margin benefits on expiry day. The intent is to make sure traders carry enough capital to absorb the leverage they are taking.

• Nifty 50 lot size: 65 units per lot
• Bank Nifty lot size: 30 units per lot
• FinNifty lot size: 60 units per lot
• Sensex lot size: 20 units per lot
• Only one weekly expiry per exchange is permitted under current SEBI rules

Costs And Charges You Cannot Ignore

Both equity and F&O carry a stack of statutory charges. Knowing them prevents nasty surprises when a small winning trade turns into a tiny one. Securities Transaction Tax (STT) is the biggest, and it works differently across segments. Delivery equity pays 0.1% on both buy and sell. Intraday equity pays 0.025% on the sell side. Futures pay 0.05% on the sell side. Options pay STT on the sell-side premium, and on exercised in-the-money options STT is charged on the intrinsic settlement value, which can be a painful shock if you let options expire in the money.

On top of STT you pay exchange transaction charges, a small SEBI turnover fee, GST at 18% on brokerage and transaction charges, and stamp duty on the buy side. Brokerage itself varies. Many discount brokers charge zero on delivery equity and a flat fee, often around Rs 20 per executed order, on intraday and F&O. Always run your trade through your broker's cost calculator before assuming a profit is real.

How Tax Really Works On Each

This is the area the old page got wrong, so read it carefully. For listed equity delivery, gains are capital gains. If you held the shares for 12 months or less, it is a short-term capital gain taxed at a flat 20% (this rate applies to gains on or after 23 July 2024). If you held for more than 12 months, it is a long-term capital gain, and the first Rs 1.25 lakh of long-term equity gains in a financial year is exempt, with the excess taxed at 12.5%. Applicable surcharge and cess sit on top.

For derivatives, the picture is completely different. F&O profit and loss is treated as non-speculative business income. It is added to your total income and taxed at your normal slab rate, which can be higher or lower than 20% depending on how much you earn. The upside is that you can set off F&O losses against other business income and carry forward losses, and you can deduct genuine trading expenses. If turnover crosses the threshold, a tax audit may be required, so keep clean records.

Which One Is Right For You

If your goal is to build wealth slowly with limited downside, delivery equity is the safer home. You own real businesses, collect dividends, face no expiry pressure, and your worst case is the capital you committed. The favourable long-term tax treatment, with the Rs 1.25 lakh annual exemption, rewards patience. The discipline required is mostly emotional, namely holding through volatility rather than panic selling.

Derivatives earn their place in two roles. The first is hedging, for example buying a Nifty put to protect a stock portfolio during an uncertain event. The second is tactical short-term trading by people who understand leverage, margin calls and the daily mark-to-market grind. Most retail F&O traders lose money, a fact SEBI has repeatedly published, so size positions small, define your maximum loss before you enter, and never treat margin as free money.

• New investor with a long horizon: start with delivery equity and index funds
• Holding a stock portfolio and worried about a known event: consider a protective put hedge
• Comfortable with leverage and active management: futures and options for defined, small bets
• Never: putting capital you cannot afford to lose into naked option selling

Sources And Further Reading

Rules, rates, lot sizes and margins change. Always confirm the current numbers on the official source before you trade. Useful references include NSE India for contract specifications and lot sizes, SEBI for regulatory circulars on expiry and margins, the Income Tax Department for current capital gains and business income rules, and Zerodha Varsity for plain-language tutorials.

Sources and Further Reading

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