Commodity trading has shot up in popularity in recent times due to the various benefits it offers. Commodities help you beat inflation. It also lets you diversify your asset allocation strategy. And, buying commodities like gold or silver can be a wise decision to fulfil future financial goals.
However, since most high-return investment instruments are taxed in India, it is crucial to know the tax on commodity trading to invest and trade sensibly. The following sections take you through all facets of the commodity transaction tax and the impact it can have on your income from the commodity market.
A Short History of The Commodity Transaction Tax
Unlike stocks and mutual funds, commodity trading was exempt from taxation for a considerable time after its inception. However, in the financial year 2013-14, the then Finance Minister, Mr P. Chidambaram, proposed to bring commodity trading under the tax net since he felt that there were hardly any differences between derivatives trading in securities and commodities except for the asset class itself. The Finance Ministry eventually introduced the Commodity Transaction Tax (CTT) for all transactions in the non-agricultural commodities segment.
Initially, the Commodity Transaction Tax was 0.01% of the total turnover in a day on non-agricultural commodities. Incidentally, the same rate also applied to equity futures, albeit by a different name, Securities Transaction Tax (STT).
Before 2013-14, the Finance Act of 2008-09 also proposed a tax on commodity trading, to the tune of 0.017%, mainly on options selling. However, the proposal was shelved due to opposition from the Prime Minister’s Economic Advisory Council.
Tax on Commodity Trading - Speculative and Non-Speculative Income
Commodity trading mainly occurs through exchanges like MCX (Multi Commodity Exchange of India), NCDEX (National Commodities and Derivatives Exchange of India), and others. Commodity trading allows traders to trade in spot, futures, and options. The tax on commodity trading depends on the contract type chosen by the trader.
Commodity traders broadly engage in two types of trading:
1) Speculative Trading: Speculative trading is similar to what stock traders call intraday trading. In speculative trading, the trader buys or sells commodities in the morning and sells or buys the same commodities in the evening, before the market closes. Since the contracts are cash-settled without delivery, they are classified as speculative trading.
2) Non-Speculative Trading: Non-speculative trading is to the commodity market what positional trading is to the stock market. In non-speculative trading, the trader buys or sells commodity futures or options and holds it for one or more days. Since the ownership of the commodity transfers from one person to another, it is known as non-speculative trading.
In India, both speculative and non-speculative trading is classified under business income and taxed as per the tax payee’s income tax slab. The nature of a tax on commodity trading makes it different from stock trading.
When you trade stocks, you might have to pay two types of taxes - STCG and LTCG. STCG or Short-Term Capital Gains Tax applies to profits made by selling shares within one year from the investment date. And, LTCG means selling stock(s) after one year from the investment date. In India, the STCG rate is 15%, whereas the LTCG rate is 10%.
The difference in the tax treatment of stocks and commodities makes it clear that it is a lot easier to compute and pay taxes on profits from commodities than stocks. However, if your investment went southwards and you had to bear losses, the tax computation might be a little more complex. The following section discusses this aspect in detail.
Tax on Commodity Trading - How to Offset Losses Against Profits
While the profits from both speculative and non-speculative income on commodity trading are taxed as per your income tax slab, the same does not apply for losses.
The Indian Income Tax laws allow you to offset your losses against your profits. But, speculative and non-speculative losses are treated differently. If you have lost money in speculative trading, you may carry forward these losses for four years from the financial year in which the losses were incurred. But, you cannot offset the losses from speculative trades with non-speculative gains.
For example, if you incurred a loss of INR 50,000 on speculative trades and made a profit of INR 50,000 on non-speculative trades, you cannot offset the speculative loss with the non-speculative gain to declare your net profit as zero. In such situations, it is wise to carry forward the speculative loss for offsetting it with any speculative gains made in the subsequent years while paying taxes only for the non-speculative gains.
However, you may offset non-speculative losses with speculative gains. Interestingly, you may carry forward non-speculative losses for up to eight years and offset them with speculative or non-speculative gains.
There are two types of taxes on commodity trading. While one is the Commodity Transaction Tax, the other is the tax on the profits made. However, you can also offset your losses with the profits by claiming under the right provisions. While speculative losses from commodity trading can be offset against speculative gains, non-speculative losses can be offset against both speculative and non-speculative gains.
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