What It Means
Exercising an option means actually using the right the contract gives you — a call buyer taking the underlying at the strike price, or a put buyer selling it at the strike — rather than just closing the position for a profit or loss in cash. Most retail traders in India never do this directly; the exchange handles it for them automatically, and usually not the way people assume.
How It Works
Every option listed on the NSE is a European option, meaning it can only be exercised on the expiry day itself, never earlier. On expiry, if your option is in the money, the exchange auto-exercises it for you — you don't submit any request. Since Indian index and most stock options are cash-settled, "exercising" doesn't mean shares actually change hands the way it might in some other markets; it means your account is credited or debited the difference between the strike price and the settlement price, multiplied by the lot size. If your option is out of the money at expiry, it simply lapses worthless — there's nothing to exercise.
Example
You're holding a Nifty call option with a strike of 24,000, bought for a premium of ₹120. At expiry, Nifty settles at 24,150 — your option is in the money by 150 points. You don't do anything; the exchange auto-exercises it and credits your account 150 points × lot size in cash, minus what you paid for the premium. You never had to "buy Nifty" at 24,000 — the whole thing settles as a cash difference.
Warning
If you've sold (written) an option instead of buying one, the auto-exercise cuts both ways — a short position that's in the money at expiry gets auto-exercised against you, debiting your account for the full difference, even if you weren't watching the clock.