Interest on Securities under "Income from Other Sources"

 

Interest on Securities under "Income from Other Sources"

1. Introduction

Income tax is the fifth head of income under the Income Tax. It is a Residuary Income which means in come not falling under the head of 1) Salary,2) House property income,3) Business Income or Professional Income and 4) Capital Gain will fall under Income From Other Sources.

Under the Income Tax Act, "Interest on Securities" is taxable under the head Income from Other Sources, provided that the securities are held as investments and not as stock-in-trade. If an individual or entity deals in securities as a business, the interest would instead be taxed under "Profits and Gains of Business or Profession" (PGBP).

2. Meaning of Securities

    Securities include bonds,pro-note , debentures issued the government. It also includes debentures or securities issued by company, a statutory corporation and local authority.

3. Classification of Securities

For tax purposes, securities are broadly categorized into four types:

A. Tax-Free Government Securities

Interest on these securities is fully exempt from tax under Section 10(15). Examples include Treasury Savings Deposit Certificates, Post Office Cash Certificates, and certain Relief Bonds. No tax is payable by the holder, and it is not included in total income.

B. Less-Tax Government Securities

Interest is taxable, but the Government does not deduct tax at source (No TDS). The investor must declare the full interest amount in their tax return and pay tax according to their slab rate.

C. Tax-Free Commercial Securities

These are issued by companies or statutory corporations. The term "Tax-Free" here is a bit of a misnomer; it means the issuer pays the tax on behalf of the holder. For the taxpayer, the "Gross Interest" (Interest received + Tax paid by the company) is taxable.

D. Less-Tax Commercial Securities

These are the most common. The company pays interest after deducting tax at source (TDS). The taxpayer must "gross up" the net interest received to find the taxable amount.

The Concept of "Grossing Up"

Grossing up means converting the net into full amount. Sometimes the income or interest is paid to investors after tax deducted at source(TDS).For the calculating income the net income will be converted into full income(Gross)

Formula for Grossing Up:

Gross Interest = (Net Interest Received × 100) / (100 - Rate of TDS)

Note: 10% is TDS rate


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