Day traders will be hit hard, after the Budget 'legitimised' speculative transactions in the derivatives market, by allowing losses from such transactions to be set off against business gains.

After this proposed amendment comes into effect from April 1, 2006, day traders who essentially close out all transactions (in cash and derivatives segment) on the same day will not be able to set off profits/losses made in the cash segment against the losses/profits made in the derivatives segment, brokers say.

Day trading constitutes more than 50 per cent of the volumes in the cash segment, with day traders also 'punting' in the F&O segment in a big way, they added.

Bimal Doshi, a chartered accountant at Mumbai-based Bhana Shah Doshi Management Consultants explained, "Since day traders close out all their positions in the cash segment and derivatives segment on the same day, their income from this is considered speculative and hence can be set off against each other. But after the proposed amendment, day traders will not be able to do this as derivatives transactions will not be considered speculative transactions."

Girish Vanvari, a partner at RSM  & Company, the Mumbai-based firm of chartered accountants, said, "Now that speculative transactions in the derivatives market have been legitimised with the government allowing losses from such transactions to be set off against business gains, it will help strengthen the derivatives market. While day traders may suffer from this move, the investor is sure to benefit."

But the market has mostly cheered the Union Budget announcement of a proposal to rationalise the tax treatment of derivatives transactions as pro-investor.

Narayan S A, managing director at Kotak Securities, said, "This amendment will take away the confusion and investors will look at the derivatives market for hedging much more easily."