Speculative Income - Definition & Exceptions

Speculative income is a type of income based on the future event. It is a type of income that is not realised until it is actually earned. It is earned from business activity wherein taxpayers face high risk of losing their money.Speculative income is different from an ordinary income and it is not an offset to capital investment or increase in the net worth. In other words, for an income to be considered speculative income, the taxpayer must have their capital at risk. The taxpayers must file ITR 3 for reporting the speculative business income or loss.Let us understand speculative income with an example.The best example of speculative income would be intra-day trading income. Intra-day trading essentially means trading of shares on the same day. In case of intra-day trading in shares, typically there is no entry into the DEMAT account as there is no entry or exit from the trading account on the same date. Thus, in case of intra-day trading no deliveries take place and therefore it can be referred as speculative transaction and the income earned from it is speculative income.

While there are many cases when the income earned can be termed speculative, you must know about the exceptions to it, which are discussed below.

Hedging the contract with respect to merchandise and raw materials

A businessperson who owns a merchandise or manufacturing business may enter into a contract during the course of the business. They guard themselves against loss, which may occur due to price fluctuation of raw materials in the future before delivering the goods or merchandise manufactured by them. Thus, the procedure of hedging a contract here means saving the goods from future loss, and therefore this cannot be considered speculative income.

Hedging contract with respect to shares and stocks

Just like the above scenario, here the person is in contract with the shares and stocks entered into by an investor or a dealer to protect them against the loss due to price fluctuations of the stocks.

Derivatives trading

An eligible transaction is a type of transaction that is carried out electronically through authorised brokers as defined per relevant statutes. This transaction is supported by a timed stamped contract note, which indicates a unique PAN (Permanent Account Number) of the client. The transactions of trading in derivatives are referred to in Securities Contracts (Regulation) Act, 1956 and it is carried out only in recognised stock exchanges.

Commodity derivatives trading

An eligible transaction is carried out in respect of trading commodity derivatives in a recognised association, which is chargeable to commodities transaction tax as mentioned under Chapter VII of the Finance Act, 2013.

Forward Contract

A forward market is defined as an over-the-counter market place. One of the primary tasks here is to set the price of a specific financial instrument or decide an asset for future delivery. Typically, a member of a forward market or stock exchange enters into a forward contract, and during the course of any transaction in the nature of arbitrage, or jobbing, the contract protects from the loss, which may arise during the course of the business.

Speculative income can be beneficial if you understand it correctly. Make sure that you comply with all the speculative business-related rules and regulations defined by the government to get maximum benefits from it.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.