[Section 56(2)(id)]: Interest on Securities Taxable under Income from Other Sources

As per Section 56(2)(id), Income, by way of interest on securities, is chargeable under the head “income from other sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of Business or Profession”.

According to section 2(28B) “Interest on securities” means:

(a)        interest on any security of the Central Government or a State Government;

(b)        interest on debentures or other securities for money issued by, or on behalf of a local authority or a company or a corporation established by Central, State or Provincial Act.

Thus securities may be divided into following categories:

(i)         securities issued by Central/State Governments;

(ii)        debentures/bonds issued by a local authority;

(iii)       debenture/bonds issued by companies;

(iv)       debenture/bonds issued by a corporation established by a Central, State or Provincial Act, i.e., autonomous and statutory corporations.

Chargeability of Interest on Securities

Interest on securities may be taxed on receipt basis or on due basis, depending upon the system of accounting if any, adopted by the assessee. If the assessee follows the cash system of accounting, interest is taxable on receipt basis otherwise it shall be taxable on due basis. If no system of accounting is followed, it will always he taxable on ‘due’ basis.

Accrual of Interest on Securities

Interest on securities accrues or becomes due on a specified date and not on a day-to-day basis. The date on which the interest shall become due is specified by the issuing authority. Interest may become due on quarterly basis, half yearly basis or annual basis, depending upon the term of the issue.

For example, if a company issues 12% debentures and specifies that interest shall become due on 31St of December every year, the due date is 31st. of December and the interest for the entire year shall become due only on 31st of December every year. The person, who is the registered owner of the debentures as on 31st December, shall be entitled to receive the interest of the full year irrespective of his period of holding.

Grossing up of Interest on Securites

Tax is also to be deducted at source on interest on securities at the prescribed rates of tax. For Income-tax purposes what is to be charged to tax is the gross amount of interest. Therefore, if net- interest is given, it has to be grossed up to arrive at the taxable amount.

in the case of Government securities other than 8% / 7.75% / floating rate Saving (Taxable) Bonds, grossing up is not required as there is no deduction of tax at source. However, grossing up is required in the case of the following securities:—

(i)         8% / 7.75% / floating rate Saving (Taxable) Bonds if the amount of interest payable exceeds Rs. 10,000 ;

(ii)       securities issued by a statutory corporation or a local authority or by any company.

Net Interest can be grossed up as under:

The rates of T.D.S. are as under:

(a)        In case of 8% / 7.75% / floating rate taxable saving bonds 10%

(b)        Non-government securities whether or not listed or recognized stock exchange 10%.

Deductions for Expenses from Interest on Securities [Section 57(i) and (iii)]

As discussed in the case of dividends, the following deductions will also be allowed from the gross interest on securities:

(a) Collection Charges [Section 57(i)]:

Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realising the interest.

(b) Interest on Loan [Section 57(iii)]:

Interest on money borrowed for investment in securities can be claimed as a deduction.

(c) Any other expenditure [Section 57(iii)]:

Any other expenditure, not being an expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.