Speculative income under business transaction
Speculative income from business transactions
What is Speculative Income?
The income earned from a Speculative transaction is a Speculative income. In speculative income, the income is base on some future event that is not realised until after it has been earned. It is earnings from a business activity in which there is a substantial risk that the taxpayer will lose money. Income from speculation is different from ordinary income since it does not offset capital investments or increase net worth. Therefore, income must involve capital risk in order to qualify as speculative.
Meaning of Speculative Transaction
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.
Example:- 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. Taxed as a short-term capital gain is the gain or loss on the selling of these shares.
Note: Generally , 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.
EXCEPTIONS TO SPECULATIVE INCOME
Exemptions from speculative treatment include the following transactions:
Hedging contract in respect of raw materials or merchandise
It is possible for a person to face losses if future price fluctuations affect contracts entered into by him for the delivery of goods manufactured or merchandise sold. He can enter into a hedge contract in order to prevent such a loss and reduce the risk exposure. Also, these agreements are not speculative in nature.
Hedging contract in respect of stocks and shares
A hedge contract between a dealer or investor to protect against stock price fluctuations is not considered speculative.
A forward market is an over-the-counter market where a financial instrument or asset is decided for future delivery. Thus, the main purpose of a forward market is to set a price for certain financial instruments.
During a transaction in the nature of jobbing or arbitrage, a forward contract protects against any loss that may arise in the course of the business entered into by a member of a forward market
Trading in derivatives
An eligible transaction (carried out electronically on screen-based systems through a recognized broker in accordance with relevant statutes and supported by a time stamped contract note indicating unique client identity number and PAN) for trading in derivatives as defined in Securities Contracts (Regulation) Act, 1956 and carried out in a recognised stock exchange is known as trading in derivatives.
Trading in commodity derivatives
Trading commodity derivatives in a recognized association, which is covered by Chapter VII of the Finance Act, 2013, is an eligible transaction (as defined above).
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.
Note: 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.
Important Points About Speculative Income
Turnover calculation for Speculative business -The turnover is the sum of both positive and negative changes.
The Speculative loss -A commercial deal (the buying and selling of things) that does not effect the delivery of the items is a speculative one. 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. Thus, the business of speculative transactions is a speculative business. Also, 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.
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