Why are profits or losses made from derivatives contracts treated as business income/loss?

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There are investors and traders, Income Tax (IT) department considers people who trade in derivatives as active traders and hence as businesses. Since active traders are considered as businesses, any profit/loss is considered as a business income or business loss.

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Praveen,

It is true that in most cases derivative contracts are treated as business transactions and the reason is:

  • The main purpose behind derivative contracts is to make profit from short term fluctuations in market prices.
  • It is also a short term transaction due to which it cannot be treated as an investment.¬†
  • And a person entering into¬†derivative¬†transaction on ongoing basis would indicate that as business.

Whether a transaction amounts to business or not depends on various other factors such as nature of other business carried on, frequency of transactions etc.

However there can be situation where profits or losses from derivative contracts are not treated as business income. For example a derivative transaction entered to hedge an investment portfolio. In such case the intention would be to preserve the value of investment portfolio but not to earn profits from such derivative transaction.

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@praveen I think @roopa has posted a more comprehensive answer, which should probably be the one that is selected.

@praveen, you should select Roopa’s answer as the best answer, she has written it very well and is more comprehensive

I did select Roopa’s answer as the Best answer :slight_smile:

Very Nice Roopa :slight_smile: