Online commodity trading has become very popular lately. There are many reasons why. Commodities can help protect you from inflation. They also allow you to spread your investments in different ways. Investing in gold or silver is also a smart way to secure your financial future.
However, knowing the tax on online commodity trading is essential. This helps to make educated investments and trades. This is because you have to pay taxes for most high-return investment products in India.
In the following sections, you’ll learn all there is to know about the commodity transaction tax. You will also learn how it might affect your earnings in the commodities market.
Commodity Transaction Tax: A brief overview
Earlier, the government didn’t levy any taxes on commodities trading. This was in contrast to the trading of stocks and mutual funds.
In 2013-2014, Mr. P. Chidambaram was the Finance Minister. He suggested a tax on the trading of commodities. It is similar to the trading of securities. He named this new tax the Commodity Transaction Tax (CTT). He applied it to all non-agricultural commodity transactions. This tax is similar to the Securities Transaction Tax (STT). You must pay this on equity investments.
The CTT was 0.01% of the daily trading volume and applied to stock futures. The buyer or seller of the commodity pays this tax. This depends on the type of transaction.
There was a proposal to increase the tax in 2008-2009. But the government did not implement it. This was because the Prime Minister’s Economic Advisory Council rejected it.
A tax on speculative and non-speculative trading in commodities income
Major commodity exchanges in India include the Multi Commodity Exchange (MCX), the National Commodities and Derivatives Exchange (NCDEX), and others. You can also trade futures and options contracts in the commodity market.
The trader selects the contract type which determines the applicable commodity trading tax.
Commodity traders make two main types of trades:
Speculative trading:
- It is the same as day trading in the stock market.
- In speculative trading, a trader buys a commodity in the morning.
- They sell it in the evening.
- They do this just before the market closes for the day. These transactions are considered speculative. They are cash-settled. They are not delivery-based.
Non-Speculative Trading: - Non-speculative commodity trading is like positional trading in stocks.
- It involves holding the position for at least one day.
- Non-speculative trade transfers ownership from one buyer to another.
Points to remember:
- Trading profits are subject to taxation in India.
- It doesn’t matter if they are speculative or not.
- You have to pay the taxes at the same rate as other business income.
- The taxpayer’s income tax bracket determines the taxable rate.
- Trading commodities is not like trading stocks. This is because of the structure of tax laws.
In certain cases, you may be liable to pay both short-term and long-term capital gains taxes on stock trades. If you sell shares within a year of buying them and make a profit out of it, you have to pay Short-Term Capital Gains Tax (STCG).
Long-term capital gain is the sale of an investment held for more than a year.
The standard short-term capital gains tax rate in India is 15%.
The long-term capital gains tax rate is just 10%.
The stock and commodity markets are vastly different. Because of this, it is easier to calculate and pay taxes on gains from commodities than stocks. When you have losses from a declining investment, it is difficult to calculate the taxes.
It is important for traders to understand the type of trading they are doing to determine the tax implications. You can consult a tax expert or financial advisor. This will help you get a better understanding of the tax implications of commodity trading.
The next section talks about this topic in depth.
How to Deduct Trading Losses and Trading Gains When Paying Taxes on Commodities?
Profits from online commodity trading are subject to income tax at your normal rate. There is no tax on the losses.
When paying taxes on commodity investments, it’s important to know how to deduct your trading losses and gains. For this, you’ll need to calculate your net profit or loss for the year. You can do this by subtracting your total trading losses from your total trading gains.
If your net result is a profit, you’ll need to pay taxes on it according to the applicable tax rate. On the other hand, if your net result is a loss, you can carry it forward to the following year and deduct it from any future gains.
The Indian Income Tax code permits taxpayers to deduct business losses from their taxable income. But, the law handles losses from speculation differently from those arising out of other types of investments.
You can carry forward the speculative trading losses for 4 years. This starts with the fiscal year when you first suffered a loss. But you can’t make up for speculation trading losses with a steady income.
If you made INR 50,000 in non-speculative transactions and INR 50,000 in speculative trades, you cannot claim a net profit of zero. This is because you cannot balance the speculative loss with the non-speculative gain.
In this case, you should carry forward the speculative loss. You can use it to offset future speculative profits. This will reduce the taxable amount of the latter.
You can balance out speculative profits against losses from other areas of your portfolio. You can also deduct non-speculative losses against either speculative or non-speculative profits. You can do this for up to eight years.
Conclusion
The exchange of commodities is subject to two different forms of taxation. The first is the Commodity Transaction Tax. The second is the income tax.
To counteract this, however, you might claim under the appropriate conditions. You must also subtract your gains from your losses.
You can only deduct commodity investment losses from futures and options profits. And you can deduct the other losses from both types of profits.
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