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Learn what commodity transaction tax is, when it is applied, and how it affects trades in commodity derivatives on recognised exchanges.
Commodity Transaction Tax, commonly known as CTT, is a tax levied on the trading of certain commodity derivatives in India. It is imposed by the Government of India on transactions executed on recognised commodity exchanges. CTT applies mainly to non-agricultural commodity futures and options contracts and is collected at the time of trade execution. It forms part of the overall transaction cost for traders and investors participating in commodity markets.
Commodity Transaction Tax in India is a tax charged on the value of commodity derivative trades conducted on recognised exchanges such as MCX and NCDEX. It was introduced in the Union Budget 2013 and came into effect from 1 July 2013. The primary purpose of CTT is to bring commodity derivative transactions under the tax framework, similar to Securities Transaction Tax in equity markets.
CTT is applicable mainly to non-agricultural commodity futures and options contracts. Agricultural commodity futures were initially exempt to protect farmers and agri-participants. Over time, the scope has evolved based on government notifications.
The tax is collected by the exchange at the time of transaction and deposited with the government. Traders do not pay it separately; instead, it is automatically included in their contract notes and brokerage statements.
Commodity Transaction Tax is calculated based on the transaction value of the contract. The rate and method of calculation depend on whether the trade involves futures or options.
The calculation typically follows these principles:
For futures contracts, CTT is charged on the sell side of the transaction.
It is calculated as a percentage of the total traded value.
For options contracts, CTT may be charged on the premium amount.
If an option is exercised, CTT may apply on the settlement price.
For example, assume a trader sells a crude oil futures contract worth ₹5 Lakhs and the applicable CTT rate is 0.01 percent. The CTT would be calculated as:
CTT = Transaction Value multiplied by CTT Rate
CTT = ₹5 Lakhs multiplied by 0.01 percent
CTT = ₹50
The exchange automatically deducts this amount at the time of settlement.
Commodity Transaction Tax varies based on the nature of the commodity and the type of derivative contract. The main categories include:
CTT on non-agricultural commodity futures contracts
CTT on non-agricultural commodity options contracts
CTT on exercised commodity options
Exemptions or reduced applicability on certain agricultural commodities
The exact rates and applicability are notified by the government and may change through amendments in the Finance Act.
Commodity Transaction Tax was introduced with specific regulatory and fiscal objectives. It aims to formalise commodity derivatives trading and generate tax revenue from organised exchanges.
The key objectives include:
Bringing commodity derivatives trading into the formal tax system
Creating parity between securities markets and commodity markets
Increasing transparency in commodity trading
Generating revenue for the government
Addressing concerns related to speculative trading activity
By imposing CTT, the government ensures that organised commodity trading contributes to tax collections in a structured manner.
Commodity Transaction Tax directly affects the cost of trading. Although the rate may appear small, it adds to the overall transaction charges paid by traders.
The impact includes:
Increased trading costs for active traders
Reduced profit margins in high-frequency trading strategies
Slightly lower liquidity in certain contracts
Higher cost structure for arbitrage and short-term traders
The impact varies depending on trading frequency and strategy. Since CTT is charged on every eligible transaction, frequent trading results in cumulative tax costs.
Commodity Transaction Tax has both benefits and limitations from a market perspective.
Advantages:
Enhances transparency in organised commodity trading
Aligns commodity derivatives taxation with equity derivatives
Contributes to government revenue
Creates a documented trail of transactions
Helps monitor speculative activity
Disadvantages:
Increases transaction costs for traders
May reduce trading volumes in certain segments
Impacts high-frequency and short-term trading strategies
Adds to the overall brokerage and statutory charges
CTT forms part of the regulatory and taxation framework governing commodity derivatives.
Although similar in structure, CTT and Securities Transaction Tax differ in scope and applicability. The following table highlights key differences.
Before reviewing the table, it is important to understand that both taxes apply to exchange-traded derivatives but in different asset classes.
| Basis | Commodity Transaction Tax | Securities Transaction Tax |
|---|---|---|
Applicable Market |
Commodity derivatives |
Equity and equity derivatives |
Introduced |
2013 |
2004 |
Asset Type |
Commodities |
Shares and securities |
Charged On |
Sell side or premium |
Buy or sell side depending on instrument |
Objective |
Tax commodity trades |
Tax securities trades |
Both taxes are statutory levies collected by exchanges and passed on to the government.
Commodity Transaction Tax is a statutory levy imposed on certain commodity derivative transactions in India. Introduced in 2013, it applies primarily to non-agricultural futures and options traded on recognised exchanges. CTT is calculated as a percentage of the transaction value and is automatically deducted at the time of trade. While it enhances transparency and contributes to government revenue, it also increases trading costs, particularly for frequent traders. Understanding Commodity Transaction Tax provides clarity on the tax implications of commodity derivative transactions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
No, Commodity Transaction Tax is not applicable on all commodities. It mainly applies to non-agricultural commodity futures and options traded on recognised exchanges. Agricultural commodities may have different treatment depending on government notifications.
Commodity Transaction Tax is calculated as a percentage of the transaction value of eligible futures or options contracts. The exchange automatically deducts the tax based on the notified rate.
The trader executing the eligible commodity derivative transaction effectively pays the tax. It is collected by the exchange and reflected in the contract note.
For traders classified as business income earners, Commodity Transaction Tax may be considered part of trading expenses for accounting purposes, subject to applicable tax rules.
CTT applies to commodity derivative transactions, while STT applies to equity and securities transactions. Both are statutory transaction-based taxes collected by exchanges.
CTT primarily applies to derivative contracts. Its applicability on delivery-based contracts depends on the nature of the contract and prevailing regulations.
Yes, CTT applies to eligible non-agricultural commodity derivative trades executed on recognised exchanges such as MCX.
If a trader sells a futures contract worth ₹10 Lakhs and the applicable CTT rate is 0.01 percent, the tax charged would be ₹100, calculated as ₹10 Lakhs multiplied by 0.01 percent.
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