CTT on exercise

For most CTT-taxable transactions, the seller pays the tax. Exercise of an option is the one place where that flips: it is the buyer — the one choosing to exercise — who pays CTT.

That makes sense once you think about who is actually making the decision. Selling a future or an option is the taxable event for a seller; choosing to exercise is the taxable event for a buyer, because the buyer is the one initiating that particular transaction.

CTT is levied on sellers of futures and options generally, but on the exercise of options, it is levied on the purchaser instead, because the buyer is the one who chooses to exercise. The workbook's CTT rate table gives three exercise-related rows: exercise of options leading to delivery of goods is taxed at 0.0001% of settlement value; exercise of options on futures, or on a commodity derivative, is also 0.0001% of settlement value; and exercise of options settled by any means other than physical delivery is taxed at a much higher 0.125% of settlement value — all payable by the purchaser.

By contrast, the plain sale of an option is taxed at 0.05% of the option premium, payable by the seller, and the sale of a commodity futures or commodity index futures contract is taxed at 0.01% of the purchase value, also payable by the seller.

A trader holds a long gold options position and chooses to exercise it into physical delivery of the underlying gold, at a settlement value of Rs 50,00,000. As the purchaser exercising the option, he pays CTT at 0.0001% of settlement value — Rs 50 on this transaction.

A different trader exercises an option on a cash-settled commodity index, with no physical delivery involved, at the same Rs 50,00,000 settlement value. Because settlement here is by a means other than physical delivery, the applicable rate jumps to 0.125% — Rs 6,250 — a rate more than a thousand times higher than the delivery-based exercise rate, despite the settlement value being identical.

Chapter 9, section 9.4.1, gives the full CTT rate table, with rows 3, 4 and 5 covering exercise into delivery, exercise on futures/commodity derivatives, and exercise settled otherwise than by physical delivery. Expect a question testing who bears CTT on exercise (the purchaser, not the seller) and the sharp rate difference between delivery-based exercise (0.0001%) and non-delivery-based exercise (0.125%).

• CTT on exercise is paid by the purchaser, reversing the usual seller-pays rule for plain sale transactions in futures and options.
• 0.0001% applies to exercise leading to delivery or to futures/commodity derivative exercise; 0.125% applies where settlement is by any other means. This is a large rate gap, and candidates often apply the smaller figure everywhere.
• The sale of an option itself (0.05% of premium) is a separate, earlier taxable event from exercise (0.0001% or 0.125% of settlement value) — do not conflate the two rates or their bases (premium versus settlement value).