What is commodity transaction tax? Meaning, rates, & applicability

Commodity Transaction Tax (CTT) is a small tax that applies when you trade certain commodity derivatives on recognised exchanges in India. It is automatically calculated by the exchange and passed on through your broker, appearing as a separate line item on the contract note.

CTT is applied in different ways depending on the contract type: on the trade value for futures, on the option premium for most option sales, and on the settlement value when options are exercised. Because the rules are standardised, traders can account for CTT in advance while planning strategies.

Over a few trades, CTT feels negligible. Over hundreds of trades, especially in active futures or options selling, it adds up. Treat it as part of your round-trip cost, just like brokerage, exchange fees, GST, and stamp duty.

Commodity transaction tax meaning

If you’re still wondering what is commodity transaction tax, the simple answer is: it is a levy on exchange-traded commodity derivatives. It is not a sales tax on physical goods. In other words, if you buy or sell commodities off-exchange, such as jewellery, crude oil supplies, or cotton bales, CTT does not apply. But if you are trading contracts on recognised exchanges like MCX or the commodity segment of NSE, CTT is usually applicable unless the contract is explicitly exempt.

CTT is charged to ensure transparency in commodity derivatives trading and is collected by the clearing corporation through your broker. It appears automatically on your contract note as part of statutory charges, so you don’t have to file or calculate it separately.

The rules are straightforward:

• Futures: CTT applies on the sale value of the contract.
  
• Options (not exercised): Option writers pay CTT on the premium received when selling.
  
• Exercised options: The liability shifts to the buyer, typically at a very small rate on the settlement value.
  

Once you know which bucket your trade falls into, you can easily estimate the impact of CTT on your cost.

Where CTT applies

CTT applies to recognised exchange trades in commodity derivatives—futures and options. That includes “options in goods” where delivery of the underlying commodity is possible. If it’s an exchange contract in the commodity universe, CTT is likely in play.

It does not apply to spot or physical transactions done outside exchanges. Buying a bar of gold from a jeweller, paying a supplier for crude oil, or taking delivery of cotton bales off exchange doesn’t trigger CTT. CTT should not be confused with GST or other local levies on physical goods.

Some agricultural commodity contracts are notified as exempt from CTT. The exemption list is contract-specific, can change, and is published by the authorities/exchanges. Always verify before you assume a contract is exempt.

CTT rates in practice

For commodity futures, CTT is typically 0.01% of the sell trade value, payable by the seller. If you buy and later sell, CTT hits only on the sell leg. The base is the notional value (price × lot size).

Commodity transaction tax example: You sell one gold futures contract worth ₹5 lakh on MCX. At 0.01%, your CTT is ₹50, payable on the sell leg.

For commodity options that are not exercised, CTT is typically 0.05% of the premium on the sell side, payable by the option writer. Buyers don’t pay CTT at purchase; they’ll face it only if the option is exercised.

When an option is exercised, the buyer usually pays CTT at a very small rate (commonly 0.0001%) on the settlement value. For certain “options in goods,” a cash-settled exercise can use a different base/rate. The contract note will reflect the correct calculation.

How CTT is collected

The exchange/clearing corporation calculates CTT at the end of each trading day. Your broker pays it on your behalf and then debits your ledger. You don’t need to authorise anything; it’s automatic.

On the contract note, CTT appears in the statutory charges section, separate from brokerage and exchange transaction charges. Some brokers show it per trade; others consolidate it for the day.

If you reconcile costs, export your contract notes to a spreadsheet. Map each eligible trade to its CTT base-sell value for futures, premium for option writes, settlement value for exercises, and rebuild the totals. Small mismatches usually come from using the wrong base.

Why CTT matters to traders and hedgers

CTT is part of overall trading costs, alongside brokerage, exchange fees, GST, and stamp duty. Each of these charges reduces gross profit and loss, and overlooking CTT in backtests can turn a seemingly profitable strategy into a loss-maker in live trading.

For options, the incidence of CTT depends on the position: option writers incur it when selling premium, while option buyers usually avoid it at entry but pay a small amount if the option is exercised. The strategy structure determines who bears the cost and at what stage.

For hedgers working with tight margins, even minor costs matter. Frequent futures rollovers or regular option writing can cause these small charges to accumulate. It is important to account for CTT in advance before scaling positions.

Common mistakes and how to avoid them

Mixing up who pays. For futures and non-exercised options, the seller pays; on exercise, the buyer pays (at a tiny rate). If your cost model assumes otherwise, actual returns will deviate from projections.

Assuming every agri contract is exempt—only notified contracts are. Two contracts in the same crop can be treated differently if one is notified and the other isn’t. Always check the latest contract specifications rather than relying on informal sources.

Ignoring “options in goods” nuance. Delivery versus cash settlement can change the base (settlement value vs difference) and the rate. If you trade near expiry, know which path your contract follows.

The bottom line

CTT may be small on individual trades but adds up over time. Know the applicable rate, the correct calculation base, and which side of the trade bears the cost. For active traders, CTT should be treated like any other expense and factored into position sizing and strategy returns.

For hedgers, it is important to confirm exemptions and contract structures before entering positions. While CTT alone will not determine business outcomes, it can tilt a finely balanced hedge from breakeven to loss.

If you operate in both securities and commodities, keep CTT analysis distinct from the Securities Transaction Tax (STT). The two apply to different products, with different rules and bases, and mixing them can distort your cost estimates.