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Taxation On Speculation & Non-Speculation Businesses

| 5/3/2012 9:00 PM Thursday

Holding shares and derivatives is classified as investing/trading and as speculation/non-speculation business depending on certain criteria. The provisions for taxation as well as the accounting of gains and losses differ depending on the nature of the transaction.

KEY POINTS

  • Profits or losses made on trading in the derivatives segment of forex, equity and commodities would be considered as non-speculation business in view of the provisions of Section 43(5) of the Income Tax Act, 1961.
  • Any expenditure, such as interest on loans borrowed for the purpose of investment in derivatives, will be allowed as a deduction under the head ‘Income from Business’ subject to the fulfillment of certain general conditions for the allowability of the deductions.
  • Speculation losses can be set off only against speculation gains within four assessment years following the year in which the said losses were incurred. Non-speculation business losses can be set off against any other non-speculation gains or income from any other head of income except for ‘Income from Salaries’ within eight assessment years following the year in which the said losses were incurred.

Q 1. This year, I have invested in the derivatives segment of forex, equity and commodities. I trade pretty frequently, making around two trades a month at a minimum and for very short terms, say one-two weeks, after which I book profits/losses. I would like to know whether this would be called speculation business or STCG. If it is speculation business, can I also claim the expenses incurred like the interest on loans taken from relatives – if yes, what is the permissible interest rate? I am paying the said relatives interest at 18 per cent p.a., through proper banking channels.

-    Rajul Parmar

Answer:

The profits or losses that you make on trading in the derivatives segment of forex, equity and commodities would be considered as non-speculation business in view of the provisions of Section 43(5) of the Income Tax Act, 1961. Any expenditure, such as interest on loans borrowed for the purpose of investment in derivatives, will be allowed as a deduction under the head ‘Income from Business’ subject to the following general conditions for the allowability of deductions:

  1. The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).
  2. The expense is not a personal expense of the assessee.
  3. The expense is laid out or expended wholly or exclusively for the purpose of the said business.
  4. The expense relates to the income earned.
  5. The expense is incurred in the previous year.
  6. The expense is not for the purpose which is an offence, or which is prohibited by law.

 

 

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