Understanding Speculation Income Taxation: Key Aspects and Guidelines

Speculation Income taxation under Income Tax

Are you making a profit from trading and investing in shares? If yes, you might think it falls under income from capital gains, right? Not so fast!

The classification isn't always that straightforward, especially when it comes to commodities like stocks and shares. Individuals often get confused about whether the income from trading these commodities should be considered PGBP income or income from capital gains. But Karr Tax is here to clear away all the confusion.

If your activity is classified as a business, there's even more to consider – whether the income is speculative or non-speculative. Let’s have a detailed explanation on this!

What Is Speculative Income?

Speculative income is a category of earnings that remains unrealized until specific conditions are met in the future. It hinges on events that are yet to unfold.

It's different from regular income because it doesn't necessarily compensate for your initial investment or add to the overall value of what you have. In simple terms, for income to be called speculative, you have to be taking a risk with your money.

The term might sound complex, but essentially, it means making money based on events that haven't happened yet and where you could potentially lose money.

What is Speculative Transaction?

A speculative transaction, as defined by Section 43(5) of the Income Tax Act, involves buying or selling a commodity, which could include stocks and shares, without the actual transfer or delivery of the commodity or scrip.

Let’s understand the concept with an example of intra-day trading in shares.

In this case, there's no actual delivery because the shares are bought and sold on the same day. This implies they don't even enter the DEMAT account, and as a result, there's no physical transfer of shares.

This absence of actual delivery categorizes such transactions as “Speculative”, and income generated from intra-day trading is considered “Speculative Income”.

Which Transactions Are Not Considered as "Speculative"?

Certain transactions are exempted from being classified as "speculative," and it's crucial to understand these exceptions. Below are instances where a transaction would not be considered speculative.

●       Hedging Contracts for Raw Materials or Merchandise

➔    A person engaged in manufacturing or merchandise business might enter into hedging contracts for raw materials or merchandise.

➔    The purpose is to protect against potential losses due to future price fluctuations concerning actual delivery contracts for the goods they manufacture or merchandise they sell.

➔    Hedging, in this context, serves as a safeguard against future losses, distinguishing it from speculative transactions.

●       Hedging Contracts for Stocks and Shares

➔    Individuals may enter into hedging contracts for stocks and shares to shield against potential losses from future price fluctuations.

➔    The objective is risk management rather than speculative gain.

●       Forward Contracts

➔    Forward contracts entered into by members of forward markets or stock exchanges are exempted.

➔    These contracts, undertaken during jobbing or arbitrage activities, are designed to protect against potential losses during business.

●       Trading in Derivatives

➔    Transactions in derivatives that are done electronically through recognized brokers, as defined by relevant statutes, are exempted from being labeled as speculative.

➔    Such transactions are supported by time-stamped contract notes, indicating unique client identity numbers and PAN (Permanent Account Number).

●       Trading in Commodity Derivatives

➔    Eligible transactions conducted in recognized associations related to trading in commodity derivatives are excluded from the speculative category.

➔    These transactions are subject to commodities transaction tax as outlined in Chapter VII of the Finance Act, 2013.

What Is The Treatment of Income or Loss from Speculative Business?

When dealing with losses from speculative business activities, it's crucial to treat the speculative business as a unique entity distinct from other businesses. According to Section 73 of the Income Tax Act, losses incurred from speculative business can only be set off against the profits generated from that specific speculative business.

●       Separate Treatment of Speculative Business

➔    It's essential to treat speculative business as a distinct and separate entity for calculating loss provisions.

➔    Profits and losses from speculative business should be treated independently from other business or professional activities.

●       Setoff and Carry Forward

➔    Speculative business loss can be set off only against the profits of speculative business in the same financial year.

➔    If there are unabsorbed losses, they can be carried forward to subsequent years but can only be set off against the profits and gains of any speculative business in those subsequent years.

●       Priority for Expenditure and Depreciation

 ➔    If there are any expenditures and depreciation related to the process of scientific research, they should be set off first.

➔    Any unabsorbed depreciation or capital expenditure carried forward is to be utilized within the speculative business.

 Limit on Carry Forward: Losses from speculative business cannot be carried forward for more than four assessment years beyond the year in which the loss was initially incurred.

Got any queries? Get in touch with our experts!

How The Turnover of Speculative Business Is Calculated?

When the turnover in a business exceeds Rs. 1 crore, an audit under section 44AB becomes necessary. However, Audit is not required upto 10 Cr. if cash payments and cash receipts do not exceed 5% of total receipts and total payments

In the domain of speculation business, particularly in shares trading and futures/options, turnover is determined by specific criteria as follows.

●       It is calculated as the total of positive and negative differences from speculation business transactions.

●       Similar to speculation business, the turnover for intra-day trading comprises the aggregate of positive and negative differences.

●       In futures trading, turnover includes the sum of both positive and negative differences resulting from trading activities.

For instance,

Frequently Asked Questions (FAQs)

1.    Which ITR needs to be filed for Speculative Income?

Individuals and Hindu Undivided Families (HUFs) engaged in speculative business activities are required to file their tax returns using ITR-3.

2.    Is intra-day trading considered a speculative business?

Yes, intra-day trading is considered a speculative business, as outlined in Section 43(5) of the Income Tax Act of 1961. Income generated from intra-day trading is classified as speculation gains or losses.

3.    How speculative business turnover is calculated?

The total sum of gains and losses, whether positive or negative, is considered when calculating the turnover for speculative business activities.

Know all about ITR filing of Speculative Trading - Visit us at www.karrtax.in