Speculative income

For income tax reasons, the income produced by taxpayers is divided into five categories which are- salary income, rental income from real estate, profits or gains from business or professions (PGBP), capital gains income, and other kinds of income. One can save his income by donating to an ngo which is registered under section 80g.

The correct classification of income is crucial since different types of income have different computation methods, deductions, incentives, and tax rates. Regarding the categorisation of income between PGBP income or income from financial assets in the case of commodities including stocks and shares, there has always been ambiguity/litigation.

The goal of the investment and the frequency of transactions must be taken into account when deciding which of these two kinds of income to classify. Additionally, if a transaction is labelled as a business transaction, the revenue must also be labelled as either speculative or non-speculative. The main focus of this paper is defining speculative income.

Definition

Although a "speculative transaction" has been specified under the income tax rule, speculative income has not. The money from a speculative transaction is hence speculative income, it might be said.

Interpretation of "Speculative Transaction"

According to Section 43(5) of the Income-tax Act, a speculative transaction is one in which the purchase or sale of a commodity, including stocks and shares, is completed in a manner other than the actual delivery or transport of the commodity or scrip.

Exceptions

The following transactions have been expressly exempted from being considered speculative transactions:-

  (a) Contract for hedging against raw commodities or goods:- In relation to contracts he has gone into for the supply of produced or sold items, a person may suffer loss in the event of future price changes. He may sign into a hedge contract to protect himself from such a loss and lower the risk exposure. These agreements are not speculative in any way.

 (b) Contract for stock and share price hedging:- A dealer or investor does not engage in speculation when they sign into a hedging contract to protect against loss resulting from price changes in stocks and shares.

  (c) Forward contract:- This is a contract that a member of a forward market or stock market enters into while engaging in jobbing (all transactions are squared off on the same day) or arbitrage (purchasing a good or security on one market and selling it right away on another market) in order to protect himself from potential losses that might occur in the regular course of his membership-related business. An over-the-counter market known as a forward market determines the price of a financial asset or asset for future delivery.

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