Speculative income is an income that is completely based on a future event. This type of income is not realised until it is earned. You can't be sure of this income and its amount. It comes from a business activity in which the individual has a great risk of losing money. The risk is higher in this type of income.
It is a little confusing to understand the proper meaning of this term. So, here is a guide for you in which we have provided the brief information about the speculative transactions and income.
What is Speculative Income?
The Speculative Income meaning can be referred to the fact that it is a type of income that does not include any type of actual delivery of product or service. This type of income is always predicted on the basis of future events, whether they will happen or not. As this type of income is completely unpredictable in the present and speculative, there is a high amount of risk involved.
There is no perfect word in the Income tax provision that can define the meaning of speculative income. Hence, the term is derived from the speculative transaction. It is understandable because the income that comes from the speculative transactions is known as the speculative income. To understand the meaning of speculative income, it is very important to learn about speculative transactions first.
How to Understand the Speculative Transactions?
Speculative business income is a type of income that is not considered or realized until it has been earned by the individuals. It is a type of income that is totally based on future events.
Example: Let's say you purchase some stocks of a company, then you expect to get the profit or dividends from this investment in the future, which is based on these stocks.
One of the most common examples of speculative transactions is Intra-day trading. It refers to the trading in which the shares are traded on the same day. When you take the case of intra-day trading, you will notice that at the end of the day, there is no entry or exit from your trading account on the same date. So, there are no entries in the DEMAT account. Hence, in case of the intra-day tardings, there are no same-day deliveries, so it can be treated as speculative transactions.
Exceptions of Speculative Transactions
As you already know, there are many transactions that are deemed to be speculative. So, it is very important to know those transactions that should not be considered speculative transactions. Here are the exceptions to speculative business in income tax:
- Hedging contract related to raw materials or merchandise: A person will only enter into a contract to guard against losses. These losses can happen in the course of his manufacturing and merchandise business, which can be related to the raw materials and merchandise. They might face loss due to the price fluctuations in the future for the manufactured goods and the total merchandise sold by them. In this scenario, the hedging contracts refer to the saving of goods from the future loss, and hence, it cannot be considered a speculative transaction.
- Hedging contract related to stocks and shares: In this scenario, there is the same condition as above. The only difference is that the individual is now in contract with his stocks and shares. They are entered into by a investor or a dealer to protect them in case there are some losses in the future because of the price fluctuations.
- Forward contract: A forward market is a marketplace that is above the normal markets. The main task here is to set a price range for the specific financial instruments or decide on an asset in case of future delivery. A member of a forward market can only enter into a forward contract. When you do different transactions, there are chances of losses in the business. These contracts help in preventing these losses.
- Derivative Trading: An eligible transaction is a type of transaction that is done by the recognized brokers electronically. These transactions are supported by a contract that is time-stamped. It also has a unique client identity number and your Permanent Account Number. The transactions that happened according to the trading in the format of derivatives are mentioned in the Securities Contracts (Regulation) Act, 1956. These transactions are being done in the recognized stock exchanges.
- Commodity Derivative Trading: An eligible transaction that is carried out as per the trading of commodity derivatives in a known association. Under Chapter VII of the Finance Act, 2013, it is also chargeable to the mentioned tax on commodity transactions.
Treatment of Income or Loss from Speculative Business
1. Speculative Businesses Are Treated as a Different Business
If a taxpayer is operating so many businesses along with a speculative business, then this type of business is deemed to be different from the other ones. The speculative business should be treated differently because they are separate from the other businesses.
2. Treatment for the Loss of Speculative Business
The losses from the speculative business can only be set off or balanced by the profits from the speculative business. If, for some reason, you couldn't set off your speculative losses, then they can be carried forward up to the 4 assessment years. But the important thing is that it can only be set off by the speculative income.
If the depreciation of the assets and capital expenditure incurred on the scientific research and related to the speculative business, then such type of expenditure must be set off on a priority basis.
Final Thoughts
Speculative transactions can only bring profits if a taxpayer is willing to take a large amount of risk. In terms of income tax, the losses that came from the speculative transactions can only be set off by the speculative profits. Speculative income is totally different from conventional income. It does not balance or compensate for the capital investments, nor can it grow net value. These businesses are different from others because there is a difference in the taxation process between them.
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