Commodity trading serves as a good option to speculate on the prices of essential goods and services in the country to make profits on the economic growth of the country. People can use commodity trading to diversify their portfolios and at the same time, buy and sell actual commodities such as gold, silver or pulses. While most people think of just gold and silver as commodities worth trading on the market, there are alternatives ranging from renewable energy to mining services.
Commodity trading in India is governed by the Securities Exchange Board of India that serves as the regulator for the commodity market in the country. SEBI has authorized more than 20 exchanges to facilitate commodity trading and investors can trade in any number of commodities in the commodity market.
However, it is important to remember that most of the commodities trade happens through derivatives called futures and options. Futures are one of the most popular ways for people to profit from commodity trading in India. Commodities see their price change through the day on the markets just like shares and their current price is called the spot price.
A future is a contract where a person agrees to buy or sell a certain quantity of a commodity at a pre-agreed price on a pre-decided date. Now, if the commodity’s price changes in a favorable direction and the person is able to sell it for more than the commodity’s spot price on the pre-agreed date, he makes a profit.
Income tax provisions
The income tax on profits from commodity trading in India is determined by the kind of contract that the trader has entered into. For instance, if the commodity contract is cash-settled without any delivery of the actual commodity, this is known as speculative income. Meanwhile, if the commodity is actually delivered and exchanges head, this profit will be classified as non-speculative income.
While both these profits are part of business income in general, it is important to know how much is speculative and how much is non-speculative in nature to be able to claim the right amount of loss set-off while filing income tax on profits from commodity trading.
Hence, if you have made a profit from commodity trading in India, you are not liable to pay capital gains tax but you are liable to add all the profits to your business income and pay tax according to the relevant tax slab, as per the Income Tax Act. This is the major law about income tax on profits from commodity trading in India.
This means that profits on commodity trading are easier to calculate and pay taxes on if you don’t have a lot of transactions or losses. It must be remembered that while you can technically also pay short term capital gains tax on commodity trade if it’s more than one day but it’s not ideal if you have lots of such transactions or the profits thus made make a big chunk of your total income. In those cases, these profits shall be classified only as business income.
Carrying losses forward
The important thing to remember about the distinction between speculative and non-speculative income is the Income Tax Act provisions about carrying forward of losses and setting them off against gains. For instance, if you have made profits from commodity trading in India through speculative income (cash-settled derivatives), then these losses can be carried forward only for four years and can be set off only against speculative gains.
Meanwhile, if your losses are non-speculative in nature (delivery based contracts), then these losses can be carried forward for eight years and be set off against both speculative and non-speculative income.
Setting off losses means that if eligible, you can deduct your losses from your total income and reduce your taxable income amount. This will mean that a lower rate of taxation will apply based on your income tax slabs and your tax liability will reduce because you have made some losses that have been set off while paying income tax on profit from commodity trading.
It is important to remember that setting off of losses is dependent upon the kind of contracts (cash-settled or delivery) that you have traded in. Investors looking to set off their losses will do well to be careful about choosing a contract that suits their income tax needs the best.