What happens when i don’t square off index options or futures on expiry? Is there any penalty or it will auto square off?
There is no penalty for letting your your position expire.
Upon expiry Futures will be settled at closing price of the underlying and any profit or loss will be credited to / debited from your account.
Options: If it expires OTM, it will expire worthless. If it expires ITM, it’ll be settled at intrinsic value and any profit or loss will be credited to / debited from your account.
Also, for exercised Options (Long ITM Options), exchange charges STT at 0.125% on the intrinsic value. This is applicable only on long positions as option seller would’ve already paid STT when short position was taken.