DSIJ Mindshare

Taxation On Speculation & Non-Speculation Businesses

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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Q 2. I am a salaried employee, and my income tax is calculated and deducted depending on the income and investments I make in the respective financial year. Recently, I have started trading online in shares and in the F&O segment on the NSE and the BSE, for which Securities Transaction Tax (STT) is paid directly.

The following is the list of gains and losses made:

  1. A gain of Rs 40000 in share transactions bought and sold in less than 12 months.
  2. A gain of Rs 80000 from delivery transactions in shares held for more than 12 months.
  3. A gain of Rs 2000 from non-delivery transactions, with shares bought and sold on the same day.
  4. A loss of Rs 30000 from trading in the F&O segment (which includes net profit and loss).

Are losses made in F&O trading allowed to be set off against short term trading gains? At what rate will my short term capital gains and intra-day gains be taxed? What about my gains from shares that are held for more than 12 months?

-    Seemantini Jayesh

Answer:

Basically, the period of holding the shares for them to classify as a short-term or long-term capital asset is relevant only if the shares are held for the purpose of investment. From the above set of transactions stated, it appears that you are trading in shares/derivatives. Thus, the income would fall under the head ‘Income from Business’.

However, if trading is done intra-day or without taking delivery of the shares, it would classify as speculation business. If you take delivery of the shares, the same would classify as non-speculation business, irrespective of the period of holding. As regards the income from the F&O segment, it will be considered as non-speculation business income in view of proviso (d) to Section 43(5) of the Income Tax Act, 1961.

Speculation losses can be set off only against speculation gains and not against income from non-speculation business or any other head of income. Further, if the losses cannot be set off against speculation gains in the year that the losses were made, the same can be carried forward and set off 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’. Further, if they cannot be set off against non-speculation business income or any other head of income in the year that the losses were made, the same can be carried forward and set off within eight assessment years following the year in which the said losses were incurred.

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