In this post, we will discuss the Speculative income under the business transaction.
The incomes from businesses and from the transaction of capital stocks and shares are different. The nature of these transactions depends on the investment’s intention and also the frequency of the transaction.
The business transaction can be divided into Speculative and non-Speculative.
We will cover the following:
- What is Speculative income?
- Exemption under Speculative income
- Treatment of loss in Speculative income
- Important points
What is Speculative Income?
The income earned from a Speculative transaction is a Speculative income.
As per Section 43(5) of the IT Act, Speculative transaction is a transaction of purchase /sale of a commodity including stocks and shares settled otherwise than by actual delivery or transfer of the commodity or scrip.
Ex. an intra-day trading income is a speculative income. Intra-day trading in shares, there is no actual delivery happening. The shares enter and exit from the trading account on the same date and do not enter the Demat account.
However, if we purchase shares on a particular day and sell it on the next day, it is not a speculative business. The profit/loss on the sale of such shares is taxed as a short-term capital gain.
Rules applicable for the holding period for the stock listed in the recognized stock exchange in India and stock not listed in India (both Foreign Company & Indian Company) are different.
Exemption under Speculative income
As per Section 43 (5) of IT Act:
- Hedging contract in respect of raw materials/merchandise – The entry of raw materials or goods into manufacturing / merchanting business to guard against loss because of any future price fluctuations. It will regard the contracts for the delivery of goods manufactured by him /merchandise sold by him.
- Hedging contract for stocks & shares – The dealer/investor enters stocks and shares by contract. This is to guard against loss in his holdings of stocks and shares because of the price fluctuation.
- Forward contract – It is done by a forward market /stock exchange member during any transaction like jobbing or arbitrage. This is to guard against loss that may arise in the ordinary course of his business as such a member. It is an over-the-counter marketplace that sets the price of a financial instrument/asset for future delivery.
- Trading in derivatives – It is an eligible transaction as referred to in the Securities Contracts (Regulation) Act, 1956 and carried out in a recognized stock exchange.
- Trading in commodity derivatives – It is an eligible trading transaction in commodity derivatives in a recognized association and is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013.
Treatment of loss in Speculative income
Speculative business as a separate business
A taxpayer can have many other businesses along with a speculative business. However, the speculative business is distinct and separate from his other businesses.
Treatment of loss from speculative business
Section 73 says that loss from speculation business is only against profits from speculative business. We can forward the loss to the next AY.
We can set it off only against the profit and gains of any speculative business in the next AY. Profit and loss from speculative transactions are separate from the profits and loss of business and profession.
No loss can be carried forward for over 4 assessment years, immediately succeeding the assessment year for which the loss was first calculated. However, if any depreciation/capital expenditure is present, we should set it off first.
Turnover calculation for Speculative business -the aggregate of both positive and negative differences is considered as the turnover.
The Speculative loss – A business transaction (purchase and sale) of goods is done where delivery of goods is not affected, is a speculative transaction. However, we term the loss in a speculative business transaction as the speculative loss.
Tax on Speculative income – As per Section 43(5), intra-day trading is a speculation business transaction. This income is either speculation gains or speculation losses. They tax income from speculation gains at a normal rate.
Non- Speculative business – A transaction of purchase/ sale of a commodity (stocks and shares) settled otherwise than by actual delivery or transfer of the commodity or scrip is a speculative transaction. The business of speculative transactions is a speculative business. A business other than speculative business is a non- speculative business.
Speculative trading – The act of trading an asset/conducting a financial transaction with a high risk rate expecting more returns/ gain. So, we can make use of the fluctuations in the market to make more profit.