Rule 4 lays down the conditions that a stock exchange must satisfy to be notified as a recognised stock exchange under section 2(92) of the Act for derivative trading. The exchange must obtain approval from the Securities and Exchange Board of India (SEBI) and operate strictly in accordance with SEBI’s prescribed guidelines. It is required to record and securely store complete client details, including the unique client identity number and Permanent Account Number (PAN). A complete audit trail of all transactions in both cash and derivative markets must be maintained for seven tax years. Transactions, once recorded in the system, cannot be erased and may only be modified in cases of genuine error. Further, the exchange must preserve details of all modified transactions and submit a monthly statement in Form No. 1 to the Director General of Income-tax (Systems) within fifteen days from the end of the relevant month. These requirements ensure transparency, accountability, and regulatory monitoring of trading activities.
Extract of Rule No. 4 of Draft Income-tax Rules, 2026
Rule 4
Conditions that a stock exchange is required to fulfil to be notified as a recognised stock exchange for the purposes of section 2(92) of the Act.
For the purposes of section 2(92) of the Act, a stock exchange shall fulfil the following conditions in respect of trading in derivatives, namely:-
(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 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;
(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.
