In India , there are two main commodity exchanges –Multi Commodity Exchange of India Ltd (MCX ) and National Commodity & Derivative Exchange Ltd NCDEX in India where one can trade in derivative contract of different items –from pulse to metal. Till now , the transactions in derivative segments were regarded as “Speculative transaction” which has a great bearing on the taxation of one’s income as the loss out of speculation is not allowed to be adjusted with any other income . Speculation loss is allowed to be adjusted with only speculation gain.
For example , a person having income of 10 lakhs from share dealing and Rs 10 lakhs loss out of commodity derivatives transaction , has actually did not earn any penny. Still, as per the provision of I T Act , he will have to pay tax on share dealing income of Rs 10 lakhs and the loss of Rs 10 lakhs will have to be carried forward as unadjusted speculation loss. That is the reason , the moment you incur loss in speculation , it becomes problematic if there is no speculation gain ti adjust.
Section 43(5) of the I T Act defines what is speculative transaction. The government vide Finance Act 2005 inserted a proviso (d) in section 5 to provide that trade in derivative segments of recognised stock exchange shall not be regarded as “speculative transaction” . The recognition of the stock exchange for the purpose of Futures and Options trades in shares was notified vide notification no SO 89(E) dated 25/01/2006.As per this notification NSE and BSE are recognised stock exchange for trade in Futures and Option . Therefore, now if the trade is done through these stock exchange , the trade will not be regarded as Speculative Transaction with effect from 25/01/2006.
What is new now?
Now the CBDT has issued Notification No. 46/2009, dated 22-5-2009 by which Multi Commodity Exchange of India Ltd (MCX ) has been recognised under section 43(5)(d) which means that the trade in derivatives through MCX exchange will now be regarded as Business transaction and therefore , the loss , if in unfortunate event of incurring loss will be allowed to be adjusted with any other business income or or from other heads. If you trade through , NCDEX , you will not have this facility.
The the notification 46/2005 dated 22-5-2009 is given below
In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act, 1961 (43 of 1961), read with rule 6DDB of the Income-tax Rules, 1962, the Central Government hereby notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause with effect from the date of publication of this notification in the Official Gazette.
2. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical inspection by the Director-General of Income-tax (Investigation) having jurisdiction over such exchange and provide copies of the relevant information as and when required.
3. The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDA of the Income-tax Rules, 1962, subject to which the recognition is granted, is violated.
4. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDB of the Income-tax Rules, 1962.
Caveat : This notification is effective from the date of publication in Gazette of India. Gazette notification date is still unknown, therefore exact date of publication will be the date from which the transaction in derivatives through MCX shall be regarded as business activity.
That is why derivative trading through MCX is better than trading through NCDEX!
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