Speculative Business income
Speculative business income refers to profits or gains derived from speculative transactions in certain commodities, including shares, securities, and derivatives. Speculative transactions are characterised by a high degree of risk, uncertainty, and the intention to make a quick profit by taking advantage of price fluctuations.
According to the Income Tax Act, income from speculative business activities is treated separately from regular business income. Speculative transactions are considered distinct from normal business transactions, which involve the purchase and sale of goods or assets in the ordinary course of business.
Speculative business income is subject to specific tax treatment. Speculative business income is included under the head of “Income from Other Sources” for tax purposes. It is taxed at the individual’s applicable income tax slab rate along with other income sources, such as salary, interest, or rental income.
It’s important to note that losses from speculative transactions can only be set off against speculative gains. They cannot be set off against gains from regular business activities or other sources of income. Any unadjusted losses from speculative transactions can be carried forward for four years and set off against speculative gains in subsequent years.
Non – speculative Business income
Non-speculative business income refers to the profits or gains derived from regular business activities that involve the purchase and sale of goods or assets in the ordinary course of business. Non-speculative business activities are characterised by a more stable and predictable nature, as opposed to speculative transactions.
Income from non-speculative business activities is generally categorised under the head of “Profits and Gains of Business or Profession” for tax purposes. It includes income generated from various business sources, such as manufacturing, trading, services, consultancy, and professional practices.
Here’s an example to illustrate non-speculative business income:
Mr. Kumar runs a retail clothing store. He purchases clothing items from wholesalers and sells them to customers at a profit. The income generated from the regular buying and selling of clothing items in his store is considered non-speculative business income.
Suppose Mr. Kumar’s total sales for the financial year are INR 10,00,000, and his total expenses, including the cost of goods sold, rent, salaries, and other business-related expenses, amount to INR 6,00,000. Therefore, his net profit from the clothing store business would be INR 4,00,000.
This net profit of INR 4,00,000 would be categorised as non-speculative business income. It is subject to taxation as per the applicable income tax slab rates, along with other sources of income Mr. Kumar may have.
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