Conceptual · Article 8.3.1
Commodity Futures.
The Contract That Lets a Jeweller, a Farmer and a Refiner Fix Tomorrow's Price Today.
Published as on 24 July 2026
A commodity future is a standardised, exchange-traded contract to buy or sell a fixed quantity of a physical commodity — gold, crude oil, copper, soybean — at a price agreed today for settlement on a future date. In India they trade on SEBI-regulated exchanges: MCX for bullion, energy and base metals; NCDEX for agricultural produce. They let producers and consumers of physical goods lock in prices and hedge against adverse moves, while speculators and arbitrageurs supply the liquidity that makes hedging feasible. Some contracts settle by physical delivery to accredited vaults and warehouses; others cash-settle against international benchmarks. These are leveraged instruments — powerful for hedging, unforgiving for the unprepared.
MCX · NCDEX
Regulated Exchanges
Sept 2015
SEBI Absorbed FMC
0.01% CTT
Non-Agri Futures
Slab · 43(5)(e)
Non-Spec Business Tax
Executive Summary · Page 2
Executive Summary · 6 Findings
A commodity future is a promise, standardised by an exchange, to trade a physical good at a fixed price on a fixed future date. For a jeweller, an oil marketer or a soybean farmer it answers one question: how do I convert an uncertain future cost or realisation into a known number today? For everyone else it is a leveraged bet on price direction. The distinction matters enormously — because the same contract that protects a producer's margin can destroy a speculator's capital.
Covers what a commodity future is and why it exists; the MCX/NCDEX exchange landscape and SEBI's takeover from the FMC in 2015; contract specifications across bullion, energy, base metals and agri; the pivotal physical-delivery-versus-cash-settlement split; a worked hedging example; the CTT cost structure; non-speculative business-income taxation under Section 43(5)(e); the surviving risks — basis, rollover, government suspension, currency; and six questions Indian participants ask.
Key Findings
A standardised contract on a physical good.
A commodity future fixes the commodity, quantity (lot size), quality grade, delivery location and expiry — all set by the exchange so contracts are fungible and a liquid secondary market can form. Underlyings span metals (gold, silver, copper), energy (crude oil, natural gas) and agriculture (soybean, chana, turmeric). Physical supply and demand drive price discovery, keeping futures anchored to spot.
Two exchanges, one regulator.
MCX is India's largest commodity exchange by turnover — bullion, energy and base metals; NCDEX is the primary venue for agricultural derivatives. Both fall under SEBI, which became the unified commodity-derivatives regulator in September 2015 when it merged with the Forward Markets Commission. NSE and BSE joined the segment from October 2018.
Settlement splits into physical and cash.
The feature with no equivalent in equity derivatives. MCX standard Gold (1 kg) and Silver (30 kg), and most NCDEX agri contracts, are physically settled — sellers deliver to accredited vaults or warehouses. MCX crude oil, natural gas and base metals are cash-settled against international references converted to INR. Retail participants must square off before the tender period, or risk delivery.
CTT applies to non-agricultural contracts only.
A Commodity Transaction Tax of 0.01% on futures (0.05% on options premium) is levied on the seller of non-agricultural commodity derivatives. Agricultural commodities are exempt. The buyer pays no CTT, and CTT paid is deductible as a business expense under Section 36 — the same asymmetry equity F&O shows between futures and options.
Non-speculative business income at slab rate.
Gains and losses are non-speculative business income under Section 43(5)(e), taxed at slab. Non-agri qualifies because CTT is paid; agri was placed on the same footing by the Finance Act 2018 from 1 April 2019. Losses set off against any business income (not salary) and carry forward 8 years; ITR-3 is required and Section 44AB audit may apply.
A hedging tool first — with real leverage risk.
Futures let producers and consumers convert uncertain prices into known ones, but you post only a margin against the full contract value, marked to market daily. An adverse move can exceed your deposit and trigger calls. Basis risk, rollover cost in contango, and the risk of government suspension in agri commodities all erode a hedge's precision.
At A Glance
| Metric | Value | Detail |
|---|---|---|
| Exchanges | MCX / NCDEX | Also NSE, BSE |
| Regulator | SEBI | FMC merged Sept 2015 |
| Coverage | Metals · Energy · Agri | Bullion to soybean |
| Settlement | Physical / Cash | Contract-specific |
| CTT (non-agri) | 0.01% | Sell-side, futures |
| Loss carry-forward | 8 years | vs business income |
| Tax | Slab · 43(5)(e) | Non-speculative |
| Best Use | Hedging price risk | Not a lottery |
Exhibit 01: Settlement & CTT by Segment
| Segment | Settlement | CTT |
|---|---|---|
| Gold / Silver (std) | Physical | 0.01% |
| Crude / Nat Gas | Cash | 0.01% |
| Base metals | Cash | 0.01% |
| Agri (NCDEX) | Physical | Nil (exempt) |
*Indicative, FY 2025-26. CTT on the sell side only; deductible under Section 36. Gold Mini and Silver Mini are cash-settled. MCX crude oil references NYMEX WTI converted at RBI's USD/INR rate — in April 2020 it settled at −₹2,884/barrel when WTI went negative.
The Opening · Page 3
The Opening
A commodity future is the oldest idea in finance dressed in modern clothing: two parties agree today on the price of a good to be exchanged later. What the exchange adds is standardisation — a fixed lot size, a defined quality grade, a named delivery point, a set expiry — so that one contract is interchangeable with the next and thousands can trade without renegotiating terms. That uniformity is what turns a private forward promise into a liquid, transferable instrument anchored to the physical spot market.
"A commodity future does not remove price risk from the world; it moves it. The jeweller who hedges hands his gold-price uncertainty to someone willing to carry it. The hedge is insurance, and like all insurance it has a cost — the upside surrendered in exchange for certainty."
Insurance, Not a Bet
The mechanics. You do not pay the full contract value to take a position — you post a margin, a fraction of it, and the contract is marked to market every day: gains are credited and losses debited against your account daily. This leverage is the source of both efficiency and danger. A small favourable move magnifies return; a small adverse move can exhaust your margin and trigger a call for more.
The physical anchor. What keeps a commodity future honest is the option — or obligation — to deliver the real thing. In many contracts the seller must deliver actual metal or grain at expiry and the buyer must accept it. As expiry nears, arbitrageurs close any gap between the futures price and the physical spot price. That gravitational pull is precisely what makes the future an effective hedging instrument rather than a detached wager.
Structure
Part I
What a Commodity Future Is, the Exchanges & Where It Fits
Part II
Contract Specs, Settlement & a Worked Hedge
Part III
The CTT Cost Structure & Section 43(5)(e) Tax
Part IV
The Verdict: Risk Tool, Not a Casino
Use If
✓ You have real physical exposure
✓ You want to lock a future price
✓ You understand margin & MTM
✓ You can manage rollover & expiry
Do NOT Use If
✕ You just want a directional punt
✕ You cannot meet margin calls
✕ You want passive diversification
✕ You may forget the tender period
Part I
What a Commodity Future Is, the Exchanges That List Them, and Where They Fit
Standardised contracts on physical goods and the price-discovery role they play; the MCX and NCDEX landscape and SEBI's 2015 takeover from the Forward Markets Commission; and who actually uses these contracts — from jewellers and oil marketers to farmers and processors.
Part I · Page 4
The Three Segments
| Segment | Examples | Primary Venue |
|---|---|---|
| Bullion | Gold, silver | MCX |
| Energy | Crude oil, nat gas | MCX |
| Base metals | Copper, zinc, nickel | MCX |
| Agriculture | Soybean, chana, turmeric | NCDEX |
Unlike equity or currency derivatives, commodity futures are anchored in physical goods, so supply-and-demand dynamics in the underlying markets — mines, oilfields, mandis — drive price discovery. That physical anchor makes them both a price-risk tool for participants who handle the commodity and a diversification asset for investors.
Why Exchanges Standardise Them
From Private Promise to Liquid Market
By fixing lot size, quality grade, delivery point and expiry, the exchange makes every contract fungible. A clearing corporation stands between buyer and seller, margins are collected, and positions are marked to market daily. This machinery converts a bilateral forward into a transferable instrument that thousands can trade — and it is what allows a farmer's hedge to find a speculator's capital on the other side.
The Exchange Landscape
| Exchange | Focus | Note |
|---|---|---|
| MCX | Metals, energy | Largest; listed on NSE |
| NCDEX | Agriculture | NABARD/LIC-backed |
| NSE / BSE | Bullion mainly | From Oct 2018 |
| Regulator | SEBI | FMC merged 2015 |
SEBI became the unified regulator of Indian commodity exchanges in September 2015, when it absorbed the Forward Markets Commission. That consolidation brought commodity derivatives under the same umbrella as equity and currency derivatives, tightening oversight, margining and investor protection.
Part II
Contract Specifications, the Delivery-versus-Cash Divide, and a Worked Hedge
How lot sizes and settlement mechanics differ across bullion, energy, base metals and agri; why physical delivery — unique to commodities — keeps futures tethered to spot; and a step-by-step example of a jeweller neutralising gold-price risk on MCX.
Part II · Page 6
Selected Specifications
| Contract | Lot | Settlement |
|---|---|---|
| Gold (std) | 1 kg | Physical |
| Gold Mini | 100 g | Cash |
| Silver (std) | 30 kg | Physical |
| Crude Oil | 100 bbl | Cash |
| Nat Gas | 1,250 MMBtu | Cash |
| Copper | 2.5 MT | Cash |
| Soybean (NCDEX) | 10 MT | Physical |
Physical Delivery — the Feature With No Equity Equivalent
MCX standard Gold and Silver, and most NCDEX agri contracts, are physically settled: sellers deliver the commodity to an accredited vault or warehouse and buyers accept it. Delivery intent must be signalled before the tender period, typically four or more days before expiry. Most retail brokers auto-square client positions near expiry to prevent inadvertent delivery obligations.
Cash Settlement & the International Link
Gold Mini, Silver Mini, crude oil, natural gas and base metals cash-settle. MCX crude references the NYMEX WTI front-month price converted at the RBI USD/INR reference rate — embedding a currency dimension. In April 2020, when WTI settled at −$37.63, MCX crude settled at −₹2,884/barrel.
Worked Example: Jeweller Hedging Gold
The Position
A Jaipur manufacturer commits in November to supply jewellery worth 1 kg of gold in February, at today's price. To hedge, it buys 1 lot of MCX Gold (1 kg) at ₹75,000/10 g — a ₹75,00,000 contract — posting only the margin, not the full value.
Scenario A — Gold rises to ₹80,000
Sourcing cost climbs ₹5,00,000. Futures gain ₹5,00,000. Net: breakeven — margin preserved.
Scenario B — Gold falls to ₹72,000
Sourcing cost drops, but futures lose ₹3,00,000 — the upside surrendered for certainty.
The hedge converts an uncertain raw-material cost into a known figure. That is its entire purpose — and its price: in a falling market the manufacturer participates less fully, having traded away that upside for predictability.
Part III
The Cost Structure, CTT, and Taxation Under Section 43(5)(e)
Why CTT falls on non-agricultural contracts only and how it interacts with the tax code; the classification of gains as non-speculative business income; and the set-off, 8-year carry-forward, audit and ITR-3 mechanics that follow.
Part III · Page 8
The Cost Stack
| Component | Non-Agri | Agri |
|---|---|---|
| CTT — futures | 0.01% sell | Nil |
| CTT — options | 0.05% premium | Nil |
| STT | Nil | Nil |
| Exchange / SEBI | Applicable | Applicable |
| Stamp / GST | Applicable | Applicable |
CTT — Seller Only, Deductible
CTT is levied only on the seller, at the time of sale; the buyer pays none. It is deductible as a business expense under Section 36. The options rate (0.05% of premium) is five times the futures rate (0.01% of contract value) — the same asymmetry equity F&O shows. Crucially, paying CTT is what earns non-agri futures their non-speculative status.
Taxation (FY 2025-26)
Non-Speculative Business Income — Section 43(5)(e)
Gains and losses are non-speculative business income taxed at your slab (individuals) or corporate rate. Non-agri qualifies because the trade is on a recognised exchange and subject to CTT. Agri futures were placed on the same footing by the Finance Act 2018, effective 1 April 2019 — removing the earlier CTT-dependency ambiguity.
Set-off, Carry-Forward & Audit
Losses set off against any business income in the same year (never against salary) and carry forward 8 years. ITR-3 is required — ITR-4 Sugam is not permitted. Turnover for a Section 44AB audit is the absolute value of profit and loss on each settled trade (ICAI methodology, as for equity F&O).
One NCDEX Caveat
NCDEX was notified as a recognised exchange for Section 43(5) purposes only from 27 November 2013. Transactions before that date do not receive the non-speculative carve-out — a point that matters only for historical assessments, but worth knowing.
Part IV
The Verdict
A precision instrument for real exposure. A trap for everyone else.
Part IV: The Verdict · Page 10
30-Second Summary
A commodity future is a standardised, exchange-traded contract to buy or sell a fixed quantity of a physical commodity at a price fixed today for a future date. In India they trade on SEBI-regulated exchanges — MCX for bullion, energy and base metals, NCDEX for agriculture — after SEBI absorbed the Forward Markets Commission in September 2015. Some contracts settle by physical delivery to accredited vaults and warehouses; others cash-settle against international benchmarks converted to INR.
Gains are non-speculative business income under Section 43(5)(e), taxed at slab, with set-off and 8-year carry-forward; a Commodity Transaction Tax of 0.01% (futures) applies to non-agricultural contracts only. Used by a producer or consumer with genuine exposure, a future is precise, disciplined risk management. Used as a leveraged directional bet by someone with no underlying position, it is a fast way to lose money — most retail F&O speculators do. The tool is the same; only the intent differs.
"Ask one question before you trade a commodity future: do I own, or will I owe, the physical thing this contract is priced on? If yes, the future is a helmet — it protects a position you already carry. If no, it is a racing car with the brakes removed. The instrument does not care which you are. Your capital will."
The Final Orientation
ADWIZR · July 2026
Decision Rules
Use Correctly As
✓ A hedge against real exposure
✓ A locked input or output price
✓ A producer/consumer margin shield
✓ A disciplined, margined position
Misuse Destroys Value
✕ A leveraged directional punt
✕ Passive commodity diversification
✕ Capital you cannot lose
✕ Ignoring the tender period
Three Misconceptions
What Participants Get Wrong
(1) "My loss is capped at my margin." No — MTM losses can exceed the deposit and trigger calls. (2) "A hedge is free protection." It surrenders favourable moves and carries basis and rollover costs. (3) "MCX crude is a pure oil bet." It carries embedded USD/INR currency risk via the reference-rate conversion.
The Surviving Risks
Basis, Rollover, Suspension & Currency
Basis risk: the exchange price and the local mandi/port price diverge. Rollover cost: contango premiums accumulate across rolls. Government suspension: agri futures (wheat, tur, onion) have been suspended during food inflation, stripping hedgers of protection. Currency: internationally-priced contracts carry embedded INR exposure.
Investor FAQ
Questions Indian Participants Ask
Six questions, answered directly.
Investor FAQ · Page 12
Frequently Asked Questions
Q1 Can I lose more than I invest in commodity futures?
Q2 What is the difference between MCX and NCDEX?
Q3 How are commodity futures taxed in India?
Q4 What is CTT and when does it apply?
Q5 Will I be forced to take physical delivery of gold or soybean?
Q6 Should a retail investor trade commodity futures?
Key Terms & Definitions
Commodity Future
A standardised, exchange-traded contract to buy or sell a fixed quantity of a physical commodity — metal, energy or agri produce — at a price agreed today for settlement on a future date. The exchange sets lot size, quality grade, delivery point and expiry so contracts are fungible and tradable.
Physical Delivery vs Cash Settlement
Physical-delivery contracts (MCX standard Gold/Silver, NCDEX agri) require the seller to deliver the actual commodity to an accredited vault/warehouse at expiry. Cash-settled contracts (Gold Mini, crude oil, base metals) instead settle the P&L in cash against a reference price, with no goods changing hands.
Margin & Mark-to-Market
You post a margin — a fraction of contract value — rather than the full amount, and the position is revalued daily: gains credited, losses debited. This leverage magnifies both return and risk, and can trigger a margin call for additional funds when the market moves against you.
Basis Risk
The risk that the exchange futures price and the local physical spot price (at a specific mandi or port) do not move identically. Differences in quality, location and timing mean a hedge rarely offsets the physical exposure perfectly — the residual gap is basis risk.
Contango & Backwardation
Contango is when futures trade above spot, so rolling a hedge forward costs a premium; backwardation is when futures trade below spot, so the roll earns a discount. These roll costs accumulate over multiple rollovers and affect a hedge's net efficiency.
Section 43(5)(e) & CTT
The Income Tax provision that classifies commodity-derivative gains as non-speculative business income, taxed at slab with 8-year loss carry-forward. Non-agri contracts qualify because CTT — the Commodity Transaction Tax, 0.01% on the sell side of futures — is paid; agri contracts qualify via the Finance Act 2018.