Tax on Speculative Income

The rise in trading activities, especially intraday trading, has led to a growing need for clarity on speculative income taxation. Speculative income, which arises from trades settled on the same day, is treated differently from other types of income. Misclassifying speculative and non-speculative income can lead to errors in tax filings, penalties, and financial losses.

This article aims to simplify the tax rules for speculative income, covering everything from definitions to tax rates, set-off and carry-forward rules, ITR filing requirements, audit regulations, and tips for compliance. Whether you are a first-time trader or an experienced investor, understanding these rules is essential for effective tax planning and compliance.

Speculative income refers to profits earned from trading activities where transactions are settled on the same day. These trades are considered speculative because they involve high risk and do not involve the actual delivery of assets.

Examples of speculative income:

• Intraday equity trading: Buying and selling stocks within the same trading session.
• Unsettled futures contracts: Trades where delivery is not taken.
• Currency and commodity trading: Transactions settled without delivery.

Exclusions:

Speculative income does not include:

• Delivery-based equity trades: These are classified as capital gains.
• F&O trades: Futures and options are non-speculative if delivery is involved.
• Short-term and long-term capital gains: These are taxed under separate provisions.

Key differences in meaning

Examples of each type of income

• Speculative: Intraday equity trading, unsettled currency trades.
• Non-Speculative: Delivery-based stock trades, futures contracts with delivery.

Why the classification matters for taxpayers

Correct classification impacts:

• Tax rates: Speculative income is taxed as business income, while non-speculative income may fall under capital gains taxation.
• Loss set-off: Speculative losses can only be set off against speculative profits.
• Audit requirements: Turnover calculations differ for speculative and non-speculative income.

Speculative income is treated as business income and taxed according to your applicable income tax slab rates under the old or new tax regimes.

Example:

If your total income includes Rs. 5 lakh from salary and Rs. 2 lakh from speculative profits, your taxable income will be Rs. 7 lakh. Under the old regime, your tax liability will be calculated based on slab rates:

• Up to Rs. 2.5 lakh: No tax.
• Rs. 2.5 lakh to Rs. 5 lakh: 5% tax = Rs. 12,500.
• Rs. 5 lakh to Rs. 7 lakh: 20% tax = Rs. 40,000.

Total tax liability = Rs. 52,500.

Trading expenses you can deduct

• Brokerage fees.
• Securities Transaction Tax (STT).
• Depreciation on trading assets.
• Internet and software expenses incurred for trading.

Expenses you cannot deduct

• Personal expenses.
• Fines and penalties.
• Interest paid on personal loans.

Set-off rules

Speculative losses can only be set off against speculative profits.

Carry-forward rules

Speculative losses can be carried forward for up to 4 years and set off against future speculative profits.

Common mistakes in reporting speculative losses

• Misclassifying F&O trades as speculative income.
• Incorrectly reporting speculative losses in ITR forms.

Speculative income is considered business income and requires filing ITR-3.

Books of accounts requirements

Traders earning speculative income above Rs. 2.5 lakh must maintain detailed books of accounts.

Presumptive taxation not allowed

Sections 44AD and 44ADA do not apply to speculative income.

Speculative traders—especially those involved in intraday equity trading—must understand when a tax audit becomes compulsory under Section 44AB. For speculative income, audit requirements depend mainly on turnover rather than profit or loss.

A tax audit becomes mandatory when your speculative turnover exceeds ₹1 crore. If you opt for Section 44AD presumptive taxation, it usually does not apply to speculative business, so intraday traders cannot use it to skip audit. For traders with very small profits or consistent losses, the audit may also apply if they report income below the taxable limit without maintaining proper books.

Turnover calculation for intraday speculative trades is unique and simpler than for F&O. For intraday equity, turnover is calculated using the absolute sum method—you add up the absolute value of all profits and all losses, without netting them off. Brokerage or taxes are ignored.

Example:

• Trader A makes a profit of ₹40,000 in some trades and a loss of ₹70,000 in others.
• Turnover = |40,000| + |70,000| = ₹1,10,000.

If this turnover crosses ₹1 crore in a year, a tax audit under Section 44AB becomes compulsory. Additionally, if the trader wants to declare income below taxable limits while turnover exceeds ₹25 lakh–₹1 crore (depending on situations), an audit may also be needed.

Turnover formula for intraday trades

Turnover = Absolute sum of profits and losses from intraday trades.

Examples of turnover calculation

• Profit: Rs. 1 lakh, Loss: Rs. 50,000
  Turnover = Rs. 1.5 lakh.

  
  

Why turnover matters for audit and ITR

Turnover determines whether you need a tax audit and impacts ITR filing requirements.

Intra-day equity trading

Profits from intraday trading are classified as speculative income.

Commodity intra-day trading

Speculative rules apply to commodity trades settled on the same day.

Currency intra-day trading

Unsettled currency trades are considered speculative income.

Crypto speculative trading

Due to legal ambiguity, traders are advised to maintain proper documentation and comply with tax laws.

Myth 1: Speculative income is tax-free if losses offset.

Fact: Speculative income is taxable even if losses are set off.

Myth 2: All trading income is capital gains.

Fact: Intraday trading income is classified as business income.

Maintain a proper trading ledger

Record all transactions systematically to simplify tax filing.

Avoid mixing trading and personal expenses

Keep trading-related expenses separate to avoid disallowances.

Plan prepaid tax and advance tax timing

Pay advance tax to avoid interest penalties.

Combine speculative and non-speculative strategies for better tax efficiency

Diversify trading strategies to optimise tax benefits.

Use technology tools (broker reports, P&L statements)

Leverage broker-provided reports for accurate turnover and profit calculations.

Speculative income comes from intra-day trading, where you buy and sell shares on the same day without taking delivery. These profits are treated as business income and taxed as per your normal slab rates. Capital gains arise from delivery-based trading, where shares are held for more than one day. These gains are taxed separately as STCG (15%) or LTCG (10% above ₹1 lakh).
Example: Same-day buy–sell of TCS = speculative income; holding Infosys for 3 months before selling = capital gains.

Comparison Table

Incorrect reporting of speculative income can trigger notices and scrutiny from the Income Tax Department. Using the wrong ITR form, such as filing ITR-2 instead of ITR-3 for intraday trading, can lead to defects. Not reporting speculative losses means you lose the chance to carry them forward, and the department may question inconsistencies. Many traders also face GST confusion, even though intraday trading does not require GST registration. Mismatches between your reported numbers and AIS, TIS, or broker P&L reports can trigger alerts. Under-reporting turnover—common due to incorrect intraday turnover calculation—may also attract scrutiny.

To avoid issues:

• Use ITR-3 for speculative income.
• Report all profits and losses accurately.
• Match your data with broker statements and AIS.
• Maintain basic books or summaries of trades.
• Calculate turnover using the absolute sum method.

Step 1: Collect Broker P&L + Turnover Report

• Download annual P&L, intraday summary, and turnover statement.
• Use it to calculate speculative turnover using the absolute sum method.

Step 2: Identify Speculative vs Non-Speculative Income

• Mark intraday trades as speculative.
• Separate F&O, delivery trades, dividends, and other income.

Step 3: Add Expenses

• Include broker charges, internet costs, advisory fees, etc.
• Add only actual trading-related expenses.

Step 4: Fill Balance Sheet + P&L in ITR-3

• Enter gross turnover, expenses, and net profit/loss.
• Add basic balance sheet details like assets, cash, and trading capital.

Step 5: Validate with AIS/TIS

• Ensure figures match AIS/TIS and broker data to avoid mismatches.

Step 6: Submit and Verify

• Review your ITR, submit, and complete e-verification to finish filing.

Understanding speculative income tax rules is crucial for traders to ensure compliance, avoid penalties, and optimise returns. Accurate classification, proper documentation, and adherence to tax regulations can simplify the filing process and improve tax efficiency. For expert financial solutions tailored to your trading needs, explore Bajaj Finserv’s offerings to streamline your financial planning and investments.