Document
Index

Speculative Income - Meaning, Taxability, Exceptions

By Mohammed S Chokhawala

|

Updated on: Jul 5th, 2024

|

3 min read

For income tax purposes, the income earned by the taxpayers is categorised under five major heads such as income from salary, income from house property, profits or gains of business/profession (PGBP), income from capital gains, and income from other sources.

Right classification of income plays an important role as the method of computation, deductions, incentives, and tax rates prescribed vary for different heads of income. Let’s quickly test you on this. Would you classify your income from share trading and investment as PGBP income or income from capital gains? The answer seems simple right - Capital Gains

Well, not entirely correct. There has always been confusion/litigation regarding the classification of income between PGBP income and income from capital gains in the case of commodities including stocks and shares. 

Various decisions have held that the classification between these two categories of income must depend on the intention of investment and the frequency of transactions. Further, if a transaction is classified as business, it calls for further classification of the income being speculative or non-speculative. This article revolves around understanding what speculative income is and how it is treated distinctly from normal business income.

What is Speculative Income?

Speculative income is income that is not realised until it is earned. Speculative income is earnings dependent/contingent on an occurrence or non-occurrence of a future event. It is an income earned from a business activity in which the taxpayer has a significant risk of losing money is referred to as speculative income. As such the Income Tax Act does not define speculative income. Hence, it is to be interpreted in a general parlance. 

Speculative income is distinct from conventional income in a way that it does not compensate for capital investments or grow net value. In other words, for income to be considered speculative, a taxpayer must be putting capital at risk. The term itself is complicated, and this article will provide you with a detailed guide to speculative income.

You must be thinking about how it makes a difference whether an income is normal business income or it is a speculative business income. The difference lies in the taxability of speculation income separately from normal business income and the time period for which you can carry forward the losses incurred as speculation income. 

What is Speculative Transaction?

A speculative transaction is a transaction of purchase or sale of a commodity including stocks and shares which is settled otherwise than by actual delivery or transfer of the commodity or scrip (Section 43(5) of the Income Tax Act)

Example: In the case of intra-day trading in shares, there is no actual delivery as you buy the shares and sell them from the trading account on the same date and do not receive the actual delivery of shares in the DEMAT account at all. Therefore, actual delivery does not take place. Hence, they are called speculative transactions. Therefore, based on the definition it can be inferred that intra-day trading income is speculative income.

What Are the Exceptions to a Certain Transaction to be Considered as "Speculative"?

Following are certain transactions which have been specifically excluded from being treated as Speculative transactions.

  • Hedging contract in respect of raw materials or merchandise

A person may incur a loss in case of future price fluctuations in respect of goods manufactured or merchandise sold by him. To guard himself against such a loss and reduce the risk exposure, he may enter into a contract to hedge himself against the price fluctuations of raw materials or merchandise. Such contracts are not treated as speculative in nature.

  • Hedging contract in respect of stocks and shares

To guard against loss due to price fluctuations in stocks and shares a hedge contract entered into by a dealer or investor is not considered as speculative.

  • Forward contract

This is a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing (all transactions are squared off during the same day) or arbitrage (purchase of commodity or security in one market for immediate sale in another market) to guard against loss which may arise in the ordinary course of his business. A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery.

  • Trading in derivatives

An eligible transaction (carried out electronically on screen-based systems through a recognized broker as per relevant statutes and which is supported by a time-stamped contract note indicating unique client identity number and PAN) in respect of trading in derivatives referred to in Securities Contracts (Regulation) Act, 1956 and carried out in a recognised stock exchange is known as trading in derivatives and such transaction is out of the purview of the speculative transaction.

  • Trading in commodity derivatives

It is an eligible transaction (carried out electronically on screen-based systems through a registered member or intermediary as per relevant statutes and which is supported by a time-stamped contract note indicating unique client identity number, unique trade number and PAN) in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013. Such a transaction is not considered a speculative transaction.

How is Income or Loss from Speculative Business Treated?

  • Speculative business to be treated as a distinct business

If a taxpayer is carrying out many businesses along with a speculative business, such speculative business of a taxpayer must be deemed as distinct and separate from any other business carried out by him.

  • Treatment of loss from speculative business

Losses from speculative business can be set off only against profits from speculative business. If there is any loss which you cannot set off during that year, it can be carried forward to the next 4 assessment years and set-off only against the speculative income. Further, if depreciation and capital expenditure incurred on scientific research, if any, relates to speculative business then such depreciation/capital expenditure shall be set-off first.

Can't get yourself started on taxes?
Get a Cleartax expert to handle all your tax filing start-to-finish

Frequently Asked Questions

How do you calculate turnover for speculative business?

In case of speculation business, the aggregate of both positive and negative differences is to be considered as the turnover.

How is speculative income taxed?

Intra-day trading is deemed speculative business transactions under Section 43(5) of the Income-Tax Act of 1961, and the money derived from it is either speculation gains or speculation losses. Profits from speculating transactions are taxed at regular rates only. However, losses from speculating transactions are allowed to be carried forward only for a period of four years.

What is speculative trading?

Speculation is an act of trading an asset or undertaking a financial transaction in which there is a huge risk of losing most or all of the initial investment with the intention of making a significant profit. It entails trading in high-risk financial products with the prospect of large rewards. The goal is to profit as much as possible from market swings.

Which ITR is Used for Speculative Income?

Generally ITR-3 is filed for reporting speculative business income or loss similar to that of normal business income.

Can I offset losses of speculative business against normal business income?

No, Speculative business losses can be set off only against speculative business income.

I do long term investing in listed shares, will it be considered as a speculative income or normal business income.

Long term investment in shares are neither speculative income nor normal business income. It will be treated as capital asset and on the sale of such asset you will be liable to pay capital gains tax.

Loss from speculative business can be carried forward for how many years?

Loss from speculative business can be carried forward for 4 years.

Help and support
close
Loading Chat ...
Chatbot LogoChatbot Button
About the Author

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

summary-logo

Quick Summary

Income for tax purposes is categorized under different heads. Speculative income is risky and contingent on future events. Speculative transactions include intra-day trading. Exceptions to speculative transactions include hedging contracts and trading in derivatives. Losses from speculative business can only be set off against profits from speculative business.

Was this summary helpful?
liked-feedbackliked-feedback

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption