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What is margin penalty and how does it work?

Note: From 2nd July 2018 onwards, SEBI has made it mandatory for both SPAN and exposure margin to be blocked in order to take and carry forward an overnight position. If it isn't, margin penalty will be applicable. Click here for the circular from SEBI. Click here for the circular from NSE.

Check out this post on TradingQ&A for more information.

As per SEBI regulations, margin shortage penalty is levied on overnight positions held in the trading account without sufficient margin (SPAN, exposure) as prescribed by the exchange. For intraday positions shortfall margin penalty is not levied. It is levied on Equity Derivatives, Currency Derivatives, and Commodity derivatives segments. (Both the SPAN and exposure margins have to be maintained, if not margin penalties will be applicable)

The penalty levied in case of shortfall in SPAN + exposure Margin for F&O positions : 

Short collection for each client
Penalty percentage
(< Rs 1 lakh) And (< 10% of applicable margin)
(= Rs 1 lakh) Or (= 10% of applicable margin)
Note: The penalty percentage is on the shortfall amount. The ledger entry would be "Being CFX/F&O/MCX Margin Penalty Charges for the Trade Date".

Check out this page on the NSE website for more information.

Please read this post for a detailed explanation of what margin penalties are and why they are charged.