Today the capital market has assumed a very significant place in our country involving speculative transactions, derivative transactions, futures and options. Speculative transaction are the financial transaction involving speculative risk where the eventual net return or final cost is not known in advance. Derivatives are also powerful risk management tools or a financial instrument whose characteristics and value depends upon the characteristics and value of an underlier typically a commodity, bond, equity or currency. Futures and Options are also types of derivatives.
According to Section 43(5) of the Income Tax Act, 1961 (the Act) speculation transaction means a transaction, in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Following derivatives are exempted from the definition of speculative transaction:
- Trading carried electronically on screen-based system
- Through stock broker registered with SEBI
- by banks or MF on a recognized stock exchange
- Supported by time stamped contract note indicating Unique Client Identity No and PAN
Determination of turnover in case of speculative and derivative transactions is one of the important factors for every individual for the income tax purpose. As per the ICAI guidelines the turnover for the purpose of section 44AB in such type of transactions is determined below:
- The total of favourable and unfavourable differences shall be taken as turnover.
- The total of positive and negative or favourable and unfavourable differences shall be taken as turnover.
- Premium received on sale of options is to be included in turnover.
- In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.
Here it is immaterial, whether the difference is positive or negative. All the differences whether positive or negative are aggregated and the turnover is calculated.
Thus, profit or loss from such business will be taxable as income under the head profits and gains of business or profession. Tax will be charged on such income at the normal rates applicable to an individual. Such income will be charged under the head profits and gains of business or profession whether or not the assessee is carrying on any other business or profession.
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