Speculation And Non-Speculation Income

Income from intra-day trading is considered as speculation income and taxed as such. While speculation losses can be set off only against speculation gains, non-speculation business losses may be set off against short/long-term capital gains.

KEY POINTS:

• As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.
• Speculation losses can be set off only against speculation gains and not against any other head of income or non-speculation business income.
• Short-term capital loss can be set off only against income from short/long-term capital gains.
• Non-speculation business loss can be set off against the Long Term or Short Term Capital Gains made during the said year.

Q 1) Are intra-day transactions in the share market considered while calculating short-term gains/losses?

- Arup Saini

A: Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions. As per Section 43(5) of the Income Tax Act, 1961, the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. However, if based the on facts and circumstances of your case, you can prove that though delivery was not actually taken it was within your normal business transaction, it could be treated as non-speculation business income or a short-term capital gain.

As regards taxation, the income from speculation gains is taxed at the normal rates. Your tax liability would thus depend upon your net taxable income. If the income is treated as non-speculation business income/short-term capital gain (Securities Transaction Tax not paid), the taxation is at normal rates. However, if the same is treated as a short-term capital gain and the STT is paid, the tax is chargeable at specified rate, viz. 15 per cent plus education cess/higher education cess as applicable.

It may be noted that in case of speculation loss, the same can be set off only against speculation gain and thus cannot be set off against any other head of income or non-speculation business income.

Short-term capital loss can be set off only against income from capital gains, whether long term or short term.

Non-speculation business loss cannot be set off against salary income.

It may also be noted that trading in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.

Q 2) In FY2011-12, I sold some immovable property from which I have earned capital gains. During the same year, however, I have also incurred a business loss. Can the said business loss be adjusted against the capital gains on sale of property to save on my tax liability? Please advise.

- Pritesh Parulekar

A: As per Section 70(3) read with Section 71(3), a Long Term Capital Loss can be set off only against a Long Term Capital Gain and no other source or head of income.

As per Section 70(2) read with Section 71(3,) a Short Term Capital Loss can be set off either against a Long Term Capital Gain or Short Term Capital Gain only and no other head of income.

As per Section 70(2A), loss under the head ‘Income from Business’ (not being a speculation business loss) cannot be set off against Income from Salaries. However, the assessee can set off the loss against any other head of income. Speculation business losses can be set off only against speculation business gains.

In view of the above, if you have incurred a non-speculation business loss, the same can be set off against the Long Term or Short Term Capital Gains you have made during the year.