Speculative transaction
Also written Speculative transaction (Section 43(5))
Under income tax, a transaction settled otherwise than by actual delivery. Exchange-traded currency derivatives are excluded by Section 43(5), so their gains and losses are non-speculative business income.
In plain language
The Income-tax Act splits business income into two kinds: speculative and non-speculative. It treats the first kind far more harshly.
The workbook gives the test. A deal counts as speculative if it is settled without actual delivery or transfer. That holds whether it is settled from time to time or only at the end.
By that test, cash-settled currency futures and options would be speculative. No currency is ever delivered. But Section 43(5) makes an exception. It leaves out eligible derivative deals done on a recognised stock exchange. The reason is that these deals are used to hedge, or cut risk. So:
Income or loss from exchange-traded currency derivatives is normal, non-speculative business income. This is true even though no delivery takes place.
That one exception lets you set derivative losses against other business income.
How it works
Why the label matters (Chapter 9, section 9.2):
| Speculative business | Non-speculative business (ETCD) | |
|---|---|---|
| Head of income | Profits and Gains of Business or Profession | Profits and Gains of Business or Profession |
| Loss set-off | Only against speculative income | Against other heads, except salary |
| Carry forward | — (not covered in the workbook) | Up to 8 assessment years, against business income only, if the return is filed by the due date |
FPIs are different. Securities held by FPIs are always capital assets, so their derivative gains are capital gains — short-term if held for less than 12 months.
Turnover (for tax audit and presumptive tax) under the ICAI Guidance Note on Tax Audit: the total of favourable and unfavourable differences, plus premium received on sale of options, plus differences on reverse trades.
Presumptive scheme. Under Section 44AD, if turnover does not exceed Rs 2 crore, profit can be declared at 6% of turnover (digital receipts) or 8% (cash). The workbook adds that the Union Budget for FY 2024-25 raised the limit to Rs 3 crore where 95% of receipts are online. It gives the same Rs 2 crore / Rs 3 crore pair for the tax audit threshold.
The formula
ETCD turnover = Σ |favourable differences| + Σ |unfavourable differences| + Premium received on options sold
A worked example
Illustrative. The trader and all amounts are hypothetical; the rules are the workbook's.
In a year, Suresh trades USDINR futures on a recognised exchange. He also runs a small consultancy business.
| Item | Rs |
|---|---|
| Favourable differences on futures | 3,40,000 |
| Unfavourable differences on futures | 4,30,000 |
| Net loss on currency derivatives (3,40,000 − 4,30,000) | 90,000 |
| Consultancy profit | 5,00,000 |
| Salary from part-time job | 3,00,000 |
Turnover:
3,40,000 + 4,30,000 = Rs 7,70,000
Note that turnover (Rs 7.7 lakh) is far larger than the Rs 90,000 net result. Had Suresh also sold options, the premium he received would be added to turnover as well.
Treatment of the Rs 90,000 loss. Because Section 43(5) excludes exchange-traded derivatives from speculative transactions, it is a non-speculative business loss:
Consultancy profit after set-off = 5,00,000 − 90,000 = Rs 4,10,000
Salary = Rs 3,00,000 (untouched — no set-off against salary)
Had it been speculative (for instance, a similar non-delivery bet outside a recognised exchange), the Rs 90,000 loss could have been set off only against speculative income — and Suresh has none, so it could not reduce his taxable consultancy profit at all.
Why NISM asks about it
Chapter 9, section 9.2 (Taxation of Exchange Traded Currency Derivatives), gives the speculative transaction test, the Section 43(5) exclusion, non-speculative treatment, FPI capital gains treatment, turnover computation, Section 44AD and set-off / carry-forward rules. The classification question — speculative or non-speculative, and under which head — is almost certain.
Common exam traps
- Settled without delivery = speculative — unless excluded. ETCD on a recognised exchange are excluded under Section 43(5).
- ETCD income is non-speculative business income under PGBP, not capital gains — except for FPIs, for whom it is capital gains.
- Speculative losses can be set off only against speculative income.
- Non-speculative business losses cannot be set off against salary, and carry forward is 8 assessment years only if the return is filed on time.
- Turnover adds favourable and unfavourable differences (both as positive amounts) plus option premium received — it is not net profit.
- The workbook gives both Rs 2 crore and Rs 3 crore (from the FY 2024-25 Budget, with 95% online receipts) for the 44AD and audit thresholds; read which condition a question states.
Check yourself
1.Income from exchange-traded derivatives is usually treated as:
- a)Business income
- b)Income from other sources
- c)Salary income
- d)Capital gains, for all assessees
Show the answer
Answer: (a) Business income
The gains or losses arising from trading in Exchange traded derivatives are taxable under the head 'Profits and Gains from Business or Profession' (PGBP).
And it is non-speculative business income, which matters greatly for loss relief.
The general rule would say otherwise: a transaction is deemed as speculative if it is periodically or ultimately settled otherwise than through actual delivery or transfer. All exchange-traded currency derivatives in India are cash settled.
But two exclusions apply. Section 43(5) has specifically excluded certain derivative transactions from the meaning of speculative transaction as these instruments are used for hedging underlying assets. And an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956... carried out in a recognized stock exchange shall not be deemed to be a speculative transaction.
Thus, income or loss from dealing in exchange traded currency derivatives shall be deemed as normal business income (non-speculative business) even though delivery is not effected in such transactions.
The consequence: any loss arising from Exchange traded derivatives can be set off against any normal business income. The business income of an assessee is charged to tax at normal rates as applicable in case of an assessee.
Had it been speculative: any loss arising from speculative transaction could be set off only from speculative income — far narrower.
Option D is right for one category only. Securities held by FPIs are always treated as capital asset. Therefore, any profit and gains arising to FPI from derivative transactions shall always be taxable under the head capital gain, and if held for less than 12 months, as short-term capital gain or loss.
And expenses are allowed: any expenditure relating to administration is considered to be deductible.
2.For how many assessment years may an unabsorbed loss on exchange-traded derivatives be carried forward?
- a)8
- b)5
- c)6
- d)7
Show the answer
Answer: (a) 8
The unabsorbed loss can be carried forward up to 8 assessment years. It can be set off only against the business income in the subsequent years.
Note the narrowing. In the year of the loss it can be set off against the income from other heads (except salary); in later years, only against the business income.
And the entitlement is conditional: it is important to note that the assessee is entitled to carry forward the business loss provided the return of income is filed on or before the due date. If such return is not filed within the prescribed due date, the right to carry forward and set-off is lost.
A single missed deadline forfeits up to eight years of relief.
The carry forward is available because the loss is non-speculative. Income or loss from dealing in exchange traded currency derivatives shall be deemed as normal business income (non-speculative business) even though delivery is not effected in such transactions.
The exclusions that achieve this are Section 43(5) and the rule that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange shall not be deemed to be a speculative transaction.
One point to note about computing the loss in the first place: any expenditure relating to administration is considered to be deductible — brokerage, exchange transaction charges and similar costs reduce the taxable figure.
And a loss does not reduce turnover. The total of favourable and unfavourable differences is taken as turnover, so a loss-making year can still cross the audit threshold.
3.A loss on derivative transactions carried out on a recognized stock exchange can be set off against any other income during the year except:
- a)Salary income
- b)Business income
- c)Income from other sources
- d)Income from house property
Show the answer
Answer: (a) Salary income
The losses from the trading of Exchange traded derivatives, if treated as a normal business loss, can be set off against the income from the other heads. However, the business loss cannot be set off against the income from salary.
Salary is the one head that is out of reach — a general rule of the Income-tax Act for business losses, and one that surprises salaried people who trade on the side.
Everything else is available in the year of the loss — business income, income from other sources, house property.
But only in that year. The unabsorbed loss can be carried forward up to 8 assessment years. It can be set off only against the business income in the subsequent years.
Broad in year one, narrow thereafter.
None of this would be available if the loss were speculative. Any loss arising from speculative transaction could be set off only from speculative income. It is the exchange-traded status that rescues it: an eligible transaction in respect of trading in derivatives... carried out in a recognized stock exchange shall not be deemed to be a speculative transaction.
And one procedural condition governs the whole carry forward: it is important to note that the assessee is entitled to carry forward the business loss provided the return of income is filed on or before the due date. If such return is not filed within the prescribed due date, the right to carry forward and set-off is lost.
Lost, not deferred.
The rate applying to whatever income remains: the business income of an assessee is charged to tax at normal rates as applicable in case of an assessee.
Where this is taught
- Series IV · Chapter 9: Accounting and Taxation of IRDintroduced here
- Series I · Chapter 9: Accounting and Taxation of ETCDintroduced here
Related terms
- Carry forward of business lossTaking an unabsorbed business loss — including a loss on exchange traded derivatives — into later years: up to 8 assessment years, against business income only, and only if the return was filed by the due date.
- Hedge accountingAn optional accounting treatment that matches the timing of gains and losses on a designated hedging derivative with the item it hedges, instead of taking the derivative's fair value changes straight to profit and loss.
- Short Term Capital GainThe gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
- Non-speculative business incomeProfit or loss from derivatives traded on a recognised stock exchange, taxed under "Profits and Gains from Business or Profession" as ordinary business income since the Finance Act, 2005 amendment.
- Intra-head adjustmentSetting off a loss from one source against income from another source under the same head of income — the first step of loss relief, under section 108 of the Income Tax Act, 2025.
- Suspicious Transaction ReportA report a SEBI intermediary must file with FIU-IND within 7 days of concluding that a transaction or connected series of transactions is suspicious — and must never disclose to the client.