Rule 4 of the Income-tax Rules, 2026

Where this rule sits

Rule 4 gives effect to Section 2 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.

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What this rule does

The rule fixes the conditions a stock exchange must fulfil, in respect of trading in derivatives, to be notified as a recognised stock exchange for the purposes of section 2(92).

Clause (a) requires the approval of the Securities and Exchange Board of India, established under the Securities and Exchange Board of India Act, 1992, in respect of trading in derivatives, and requires the exchange to function in accordance with the guidelines or conditions laid down in this behalf by that Board. Clause (b) requires the particulars of the client, including the unique client identity number and Permanent Account Number, to be duly recorded and stored in the exchange's databases.

Clauses (c) to (f) go to the integrity of the transaction record, and each of them is expressed to cover the cash market as well as the derivative market. A complete audit trail of all transactions must be maintained on the system for a period of seven tax years. Transactions once registered in the system must not be erased. Transactions once registered may be modified only in cases of genuine error. And data regarding all registered transactions which have been modified must be maintained, with a monthly statement in Form No. 1 submitted to the Director General of Income-tax (Systems) within fifteen days from the last day of each month to which the statement relates.

Why it is there

Section 2(92) works by notification, and the rule supplies what the notification is to be tested against. The conditions are not about the exchange's commercial standing but about whether its record of trades can be relied on afterwards: an approved regulator behind it, the client identified by unique client identity number and Permanent Account Number, an audit trail that survives seven tax years, and modification confined to genuine error and separately reported. Without that, a trade on the exchange would be an assertion rather than a record.

Who it applies to

• A stock exchange seeking notification as a recognised stock exchange under section 2(92)
• A stock exchange already notified, for as long as the conditions must continue to be fulfilled
• The Director General of Income-tax (Systems), to whom the monthly statement in Form No. 1 is submitted

The figures, and what each one turns on

The forms it prescribes

• Form No. 1 — monthly statement of registered transactions which have been modified, submitted to the Director General of Income-tax (Systems)

What this means in practice

The conditions are continuing, not a one-time entry test: the audit trail must be held for seven tax years and the Form No. 1 statement recurs every month, so an exchange can fall out of compliance long after notification. Read the scope carefully — the opening words confine the exercise to trading in derivatives, but clauses (c) to (f) are drafted to bite on transactions in the cash market as well, so the systems obligations are not limited to the derivatives segment. Modification is not prohibited, erasure is: clause (d) forbids erasing a registered transaction outright, while clause (e) permits modification only in cases of genuine error and clause (f) then makes every modification visible by requiring it to be reported. The rule sets the conditions for notification; whether an exchange is in fact a recognised stock exchange still depends on the notification issued under section 2(92).

An example

An exchange with sebi approval for derivatives trading finds that 180 registered trades across its cash and derivative segments were modified during August because of genuine punching errors. It cannot simply correct and move on: it must keep the data on all 180 modifications and submit the monthly statement in Form No. 1 to the Director General of Income-tax (Systems) within fifteen days from the 31st of August. Had it instead erased the original entries, clause (d) would have been breached whatever the reason for the correction.

Where you meet this rule

A taxpayer never files anything under this rule. You meet it in the notification of a stock exchange under section 2(92), and the exchange itself meets it every month in the Form No. 1 statement to the Director General of Income-tax (Systems).

The words themselves

What people get wrong

• Treating the conditions as applying only to the derivatives segment. The opening words are about trading in derivatives, but clauses (c) to (f) expressly cover transactions in respect of the cash and derivative market.
• Keeping the audit trail for the ordinary books retention period. Clause (c) requires seven tax years, on the exchange's own system.
• Reading clause (e) as a general power to correct records. Modification is allowed only in cases of genuine error, and clause (d) forbids erasure of a registered transaction altogether.
• Filing the Form No. 1 statement with the assessing authority or at the end of the year. Clause (f) requires it monthly, to the Director General of Income-tax (Systems), within fifteen days from the last day of the month.
• Assuming sebi approval alone is enough. Clause (a) also requires the exchange to function in accordance with the guidelines or conditions laid down in this behalf by that Board, and clauses (b) to (f) stand in addition.