Commodity Query

How is income or loss from trading in commodity derivatives treated under the IT Act?

Indra Sharma

In the 2013 Budget, the Centre amended the definition of ‘speculative transactions’ under Income Tax Act to exclude commodity derivative transactions. The amendment came with the condition that it will be applicable for all commodities traded on recognised exchanges — both agri and non-agri. Further, those positions taken by the manufacturer or merchant of a raw input in a commodity derivative contract which is in the nature of a hedging transaction will also not be counted as speculation.

The advantage of this is that a loss on trading in commodity derivatives can be set off against business income which will reduce the individual’s total tax outgo. Business income is taxed at the corporate tax rate — currently 30 per cent (plus surcharge) if the income is above ₹10 lakh. If you are a salaried individual, you can set off the loss on commodities derivatives trading against income from speculative trades in equity or currency derivative, income from lottery or race wins, dividend received from companies and any other income under the head ‘income from other sources’. It can’t be set off against salary income. Losses from trading in commodity derivatives are allowed to be carried forward for a period of eight years. In the 2013 Budget, when CTT was introduced for non-agri commodities, provision was also made to allow CTT paid as a deduction from business income, if any.

(With inputs from Suresh Swamy, Partner-Financial Services Tax, PwC and Rajesh Gandhi, Partner-Deloitte Haskins & Sells LLP)

Are the commodity markets less volatile and less risky than equity markets?


No. Both are equally volatile and risky. Just like equities, commodities are also exposed to global events. For instance, if you trade on crude oil, you need to keep track of economic developments in the US, dollar-rupee movement and news on output from rigs and inventory. So, be it equities or commodities, do not jump in unless you have a good knowledge about it.

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