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Benefits of commodity trading

13 Sep 2023

Trading in commodities is a wise choice if you want to earn money off of the country's economic expansion by speculating on the costs of basic products and services. Commodity trading allows people to diversify their investment portfolios while also buying and selling tangible commodities like silver, gold or pulses. While the majority of people only consider gold and silver to be commodities valuable enough to trade on the market, there are alternatives, such as mining services and renewable energy.

The Securities Exchange Board of India, which also acts as the country's commodities market regulator, oversees commodity trade in India. Investors may trade in any number of commodities on the commodity market thanks to SEBI's authorisation of more than 20 exchanges to support commodity trading. However, it's crucial to keep in mind that the majority of commodity trading takes place via derivatives known as futures and options. One of the most well-liked methods for individuals to earn from commodities trading in India is via futures. Like shares, commodities see daily price fluctuations on the markets; the most recent price is referred to as the spot price.

A future is an agreement to buy or sell a specified quantity of a commodity at a set price on a specific date. This agreement may be made either to buy the commodity or to sell it. The individual now gains money if the commodity's price moves in his favour, and he can sell it for more money than the commodity's spot price on the pre-arranged date.

Income Tax Provisions 

The kind of contract the trader has signed will decide the income tax that will be applied to earnings from commodities trading in India. For instance, this is referred to as speculative income if the commodities contract is cash-settled without any real commodity delivery. Meanwhile, this profit will be categorised as non-speculative income if the commodity is truly delivered and trades at a profit.

While both of these earnings are generally considered to be a portion of company income, it is crucial to understand how much of each is purely non-speculative to claim the appropriate amount of loss set off when paying income tax on profits from commodities trading. Therefore, if you have profited from trading commodities in India, you are not required to pay capital gains tax. Instead, you must add all earnings to your company income and pay tax by the appropriate tax bracket, as per the Income Tax Act. This is India's primary statute governing income tax on gains from commodities trading.

This implies that if you don't have a lot of transactions or losses, it will be simpler to calculate and pay taxes on your commodities trading gains. The fact that you may legally pay short-term capital gains tax on commodity trades if they last longer than one day must be kept in mind. However, doing so is not recommended if you have a lot of such trades or if the profits you generate from them account for a significant portion of your overall income. These earnings should only be categorised as company income in specific circumstances.

Losses being Carried Forward

On the difference between speculative and non-speculative income, it's crucial to recall the requirements of the Income Tax Act regarding carrying forward losses and offsetting them against gains. For example, if you traded commodities for profit in India using speculative income (cash-settled derivatives), your losses may only be carried forward for four years and offset by speculative gains.

While this happens, non-speculative losses (contracts based on delivery) may be carried over for eight years and deducted from speculative and non-speculative revenue. Setting off losses entails being able to subtract your qualified losses from your gross income to lower your taxable income. This will result in a reduced tax rate based on your income tax slabs and a reduction in your tax obligation since you incurred losses that were offset against the income tax you paid on the proceeds from commodities trading.

It's crucial to remember that the kind of contracts you traded in—cash-settled or delivery—determines how losses are set off. Therefore, investors seeking to offset their losses would be wise to exercise caution when selecting a contract that best satisfies their income tax requirements.

Wrapping Up

Before sinking his toes into the world of derivatives trading, every trader investigates the tax treatment of commodity derivatives. While derivatives were long free from taxes, the government implemented the commodity transaction tax to tax all non-agricultural derivatives. It's time to establish a trading account with your broker and get started if you are interested in trading commodity derivatives.


Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 


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