Taxation on Commodity Transactions in India under Income Tax

Commodity trading—whether in gold, crude oil, silver, or agri-products—is a fast-growing financial activity in India, with millions of traders participating via exchanges like MCX and NCDEX. However, many traders remain unclear on how profits, losses, and transactions in the commodity market are treated under the Income Tax Act, 1961. Here’s a clear breakdown of taxation rules on commodity transactions in India.

Who Is Taxed?

All participants in commodity markets, including:

• Individual traders or investors
• Partnership firms, LLPs, and companies
• Full-time traders, hedgers, arbitrageurs, and even casual investors

…are subject to income tax based on how and what they trade.

Refer To Turnover Calculation for Shares, Options, Future & Commodity

Nature of Income from Commodity Trading

Income from commodity trading is classified as business income, but it’s further split into speculative or non-speculative, based on how the transaction is settled.

a) Non-Speculative Business Income (Most Common for MCX Traders)

As per the proviso to Section 43(5) of the Income Tax Act, transactions in commodity derivatives done on recognized stock exchanges like MCX/NCDEX are not considered speculative, even if they are settled without delivery.

✅ Examples:

• Crude oil futures traded on MCX
• Gold options traded on NCDEX

Such income is treated as non-speculative business income, eligible for regular deductions, set-off, and carried forward of losses.

b) Speculative Business Income

A transaction is speculative if:

• It is settled otherwise than by delivery, and
• It is not conducted on a recognized stock exchange, or
• It doesn’t qualify under the exceptions in Section 43(5).

✅ Examples:

• Unregulated OTC commodity trades
• Private contracts without delivery or hedging intent

Such income is speculative and subject to specific restrictions (e.g., loss set-off only against speculative profits).

c) Capital Gains or Business Income (Delivery-Based Trades)

• If you buy and take actual delivery of a commodity and hold it as investment, it’s treated as capital gains.

If delivery-based trades are done regularly (e.g., by a bullion trader), they are treated as business income.

Tax Rates and Slabs

• Individuals/HUFs: Taxed as per slab (5%–30% + surcharge/cess)
• Firms/LLPs: Flat 30% + surcharge/cess
• Companies: 25%–30% + applicable surcharge

Audit Requirements – Section 44AB

A tax audit is mandatory if:

If a trader incurs a loss and does not opt for presumptive taxation, audit is usually required.

Presumptive Taxation – Section 44AD

You can opt for presumptive taxation (44AD) only if:

• Turnover < ₹2 crore
• You declare at least 6% (digital) or 8% (cash) as profit
• Your business is non-speculative

❌ Not available for speculative business like intra-day unregulated trades

Set-Off and Carry Forward of Losses

All losses must be reported in ITR before due date to carry forward.

Books of Accounts – Section 44AA

If:

• Income > ₹2.5 lakh (individual), or
• Turnover > ₹10 lakh,

…you must maintain books of accounts, including:

• Ledger & journal
• Trade statements from brokers
• Bank statements
• Contract notes from MCX/NCDEX

GST Applicability

• No GST on commodity trades via recognized exchanges (as they are treated as “securities”)
• GST is applicable on brokerage, advisory services, and commission income.

Example

Trader X makes ₹6 lakhs from crude oil futures trading on MCX.
Turnover = ₹80 lakhs
Profit = ₹6 lakhs
Taxability: Non-speculative business income
ITR Form: ITR-3 or ITR-4 (if presumptive)
Audit: Not needed (profit >6%, turnover <₹1 crore)

Final Takeaways

• Most commodity trades on MCX/NCDEX are non-speculative business income.
• Speculative income arises only if traded outside recognized platforms or informally.
• Accurate classification is crucial for loss set-off, audit, and correct ITR form.
• For regular or high-volume traders, maintaining proper documentation and consulting a tax professional is highly recommended.