Rule 4: Stock exchange conditions for derivatives recognition
Rule 4 sets the conditions a stock exchange must meet to be notified under section 2(92) for derivatives trading. It combines SEBI approval with client identification, transaction integrity, audit trails and monthly reporting of modifications.
Official notified Income-tax Rules, 2026Need advice on Rule 4?
This article is for general information. Read the official Rules and applicable Act amendments, including the Taxation and Other Laws (Amendment) Act, 2026. If you need professional advice for your situation, contact Bizeneed.
On this page
Bare law
Rule 4 - Conditions that a stock exchange is required to fulfil to be notified as a recognised stock exchange under section 2(92)
For the purposes of section 2(92), a stock exchange shall fulfil the following conditions in respect of trading in derivatives:- (a) the stock exchange shall have the approval of the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992 (15 of 1992) in respect of trading in derivatives and shall function in accordance with the guidelines or conditions laid down in this behalf by the Securities and Exchange Board of India; (b) the stock exchange shall ensure that the particulars of the client (including unique client identity number and Permanent Account Number) are duly recorded and stored in its databases; (c) the stock exchange shall maintain a complete audit trail of all transactions (in respect of cash and derivative market) for a period of seven tax years on its system; (d) the stock exchange shall ensure that transactions (in respect of cash and derivative market) once registered in the system are not erased; (e) the stock exchange shall ensure that the transactions (in respect of cash and derivative market) once registered in the system, are modified only in cases of genuine error; and (f) the stock exchange shall maintain data regarding all transactions (in respect of cash and derivative market) registered in the system which have been modified and submit a monthly statement in Form No. 1 to the Director General of Income-tax (Systems), within fifteen days from the last day of each month to which such statement relates.
Rule breakdown
Verify approval and client identification
Check that SEBI approval covers derivatives trading and that the exchange follows the relevant guidelines or conditions. Record and store client particulars, expressly including the unique client identity number and PAN.
Protect the transaction history
The audit trail requirement extends to both cash and derivative markets. Registered transactions must not be erased. Modifications are allowed only for genuine error; retain both the correction record and its reason as a practical control supporting the prescribed requirements.
Prepare the monthly Form 1 statement
Maintain data for every registered transaction that has been modified. Submit the monthly statement in Form 1 to the Director General of Income-tax (Systems) within fifteen days from the last day of the relevant month. This obligation belongs to the exchange; it is not a monthly statement required from every investor by this rule.
Connect conditions with the notification procedure
Rule 5 requires the exchange’s application to include SEBI approval and confirmation that Rule 4(b)–(f) conditions are fulfilled. Meeting operational conditions does not by itself replace the Central Government notification process.
Key takeaways
SEBI approval
The exchange must have derivatives-trading approval and comply with SEBI’s relevant guidelines or conditions.
Seven tax years
The complete audit trail covers cash and derivative transactions and must be maintained on the system for seven tax years.
Monthly modifications report
Modified transactions must be recorded and reported in Form 1 within fifteen days from the month’s last day.
Practical checklist
- Verify the scope and continuing validity of SEBI approval.
- Test non-erasure controls and retention of seven tax years of audit trails.
- Reconcile modification logs to the monthly Form 1 statement.
Avoid
- Do not restrict the audit trail to derivatives while ignoring cash-market transactions.
- Do not treat an investor as the exchange’s Form 1 filer.
FAQs
How long must the exchange maintain the audit trail?
For seven tax years on its system, covering all cash and derivative transactions.
Can a registered transaction be modified?
Only in a case of genuine error under clause (e); modified-transaction data and monthly reporting are also required.
When is the monthly statement due?
Within fifteen days from the last day of the month to which it relates, in Form 1 to the Director General of Income-tax (Systems).