What Is Basis: Definition In Finance & Its Use In Futures And Investments

In finance, “basis” means the cost value of an investment after including all extra charges like brokerage and taxes. 

Ananya, a young fintech analyst in Pune, bought 100 shares of a tech company for ₹500 each. She paid ₹300 in brokerage. Her total cost became ₹50,300. Later, when she sold the shares at ₹600 each, her total revenue was ₹60,000. But her gain wasn’t just ₹10,000. 

She subtracted her basis, ₹50,300, and found her actual capital gain was ₹9,700. Her basis helped her understand what she earned after costs. Just like in the movie Guru, where Abhishek Bachchan says, “Jo maine socha, wahi kiya”, basis helps you figure out the real financial story behind the numbers.
 

In this blog, we will break down the meaning of basis in finance, explain how it works in futures trading, show its use in investments, and discuss how it affects your taxes. 

Why Is Basis Important in Finance?

Basis helps you know your real profit or loss from an investment. It also shows the gap between current asset prices and their future prices. This helps traders protect themselves from risks or earn smart profits.

In June 2025, the RBI cut the policy repo rate by 50 basis points to 5.50%. This small 0.50% change made borrowing cheaper, directly impacting loan rates, bond yields, business costs, and consumer borrowing across India.

Example: Karan bought a government bond for ₹1,00,000. He paid ₹1,500 extra in transaction fees. So, his basis became ₹1,01,500. Later, he sold the bond for ₹1,10,000. Many people think he made ₹10,000, but actually, he made ₹8,500, because he had to subtract his total cost (basis).

As Raj from Dilwale Dulhania Le Jayenge wisely said, “Bade bade deshon mein aisi chhoti chhoti baatein hoti rehti hai,” but in finance, these “small” numbers matter a lot.

Basis in Future Trading:

In futures trading, a “normal market” shows contango, where futures prices are higher than spot due to carrying costs. In contrast, an “inverted market” shows backwardation, where futures trade below spot, often driven by strong short-term demand.

In futures trading, the basis is defined as the spot price minus the futures price. This shows whether the market is going up or down, helping traders plan better. A negative basis means futures are priced higher than the current price.

Example: Ritika is a gold trader. She sees today’s gold price (spot) is ₹60,000. But the 3-month futures contract is ₹61,000.
Her basis is ₹60,000 − ₹61,000 = −₹1,000. This tells her that futures are trading at a higher price than today’s rate.

Basis in Different Market Conditions:

The relationship between spot and futures prices, called basis, changes with market moods. Here’s how it plays out:
 

Tracking the basis helps traders read market signals better and spot chances for smart moves or arbitrage.

Cost Basis in Stock Investments:

Cost basis is the total amount you spend on an investment, including things like brokerage fees. It helps you figure out your real profit when you sell. This is important for paying the right amount of tax.

Example: Shreya, a banker, bought 200 mutual fund units at ₹250 each. She also paid ₹400 as commission.
So, her cost basis was: ₹250 × 200 = ₹50,000 + ₹400 = ₹50,400.

Later, she sold them for ₹55,000. Her real profit? Not ₹5,000, but ₹4,600.
This small difference matters big when filing taxes.

Cost Basis vs Capital Gain

Cost basis helps you calculate real gains after accounting for all investment costs:
 

Always include extra charges in your cost basis to get a true picture of your profit and avoid tax surprises.

Basis in Commodity Trading:

In commodity trading, traders compare the price at the market (spot price) with the price in the futures contract. This is called basis. It helps decide if it’s better to sell now or later. Things like location or quality may change the basis.

Example: Sahil, a trader, deals in wheat. In Delhi, wheat's spot price is ₹2,200 per quintal. But in Mumbai, his futures contract is ₹2,300.
Basis = ₹2,200 − ₹2,300 = −₹100.

This shows it may not be worth sending wheat to Mumbai. He checks this before trading, as the basis acts as a guide for trading and delivery decisions, and factors like transport cost, storage, and quality differences also influence it.

Commodity Basis Across Cities

Price differences across cities reveal whether trading a commodity is profitable or not: 
 

Tracking basis helps traders decide when and where to buy or sell for maximum gain.

Basis in Retirement Accounts (IRA/PPF/NPS):

In savings plans like IRAs (US) or NPS/PPF (India), the basis tells us how much money came from after-tax contributions. This part of the money is not taxed again when you withdraw it. But you must file the right forms to prove it.

Example: Arvind has ₹10,00,000 saved in his NPS account. He had earlier added ₹2,00,000 from money already taxed. That means his basis is 20%. Now, he withdraws ₹4,00,000. Out of this, 20% or ₹80,000 is tax-free. The rest ₹3,20,000 is taxable.
 

If he doesn't file the form, he may pay double tax, just like Chak De! India says, “Team banane ke liye taqat nahi, niyat chahiye”, the right paperwork shows the right intent.

How Basis Helps in Arbitrage Opportunities?

Sometimes, traders find a price gap between an asset’s real value (spot price) and its futures or ETF price. This gap is called the basis. If used smartly, it can help earn quick profits. This method is called arbitrage.

Example: Rekha is a smart investor. She sees an ETF trading at ₹1,000, but the real value of its assets is ₹1,020.
Basis = ₹1,020 − ₹1,000 = ₹20.z

She buys the ETF and plans to sell it when the price matches the real value. Just like in Baazigar, where they said “Haar ke jeetne wale ko Baazigar kehte hain,” spotting this small gap early can turn into a winning move.

Cautions in Basis Arbitrage

While basis arbitrage can look profitable, traders must be careful of hidden risks that can quickly turn gains into losses. Key cautions include:

• Transaction Costs: Brokerage fees, taxes, and exchange charges can eat into profits.
   
• Liquidity Risk: Low trading volume may make it hard to enter or exit positions at the right price.
   
• Execution Risk: Price gaps can close quickly, and delays in order execution may turn profits into losses.
   
• Financing & Carrying Costs: Interest, storage, or transport costs can reduce the benefit of arbitrage.
   
• Quality Differences: In commodities, variations in grade or location can affect pricing and profitability.

By keeping these risks in mind, traders can use basis arbitrage more effectively and avoid common pitfalls that erode returns.

Arbitrage Scenarios with Basis:

When spot and futures prices differ, traders spot arbitrage opportunities: 
 

A positive basis can mean easy profit, but not every gap guarantees a win.

Conclusion:

Basis may seem like a small concept, but it impacts every trade, every investment, and every tax report. From stocks to futures to retirement funds, basis helps us understand what’s real and what’s not. Whether you’re a trader or a beginner investor, keeping an eye on your cost and market basis will save money, prevent tax errors, and help you invest smarter.

FAQs on Basis in Finance:

Does SEBI regulate basis use in India?
Yes, especially for derivatives.

How often does the basis change?
Daily, with market conditions.

Is basis relevant in 2025 investing?
Very much, due to market volatility and tax rules.

How does volatility affect basis trading?

Sudden price swings can close the gap before execution, turning a planned arbitrage into a loss.

Why can basis arbitrage fail even if a price gap exists?

Because high transaction costs, storage fees, or liquidity issues can erase the profit from the gap.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?