Interest on securities under income tax is the interest income that is received by an assesses from investing in various types of securities, such as bonds, debentures, government securities, and corporate securities. The income tax treatment of interest on securities varies depending on the type of security and the identity of the assesses.

Taxability of interest on securities

In general, interest on securities is taxable as income under the Indian Income Tax Act, 1961. However, there are certain exemptions that are available, such as:

• Interest on notified securities issued by the Central Government or State Governments is exempt from income tax.
• Interest on Post Office Savings Bank accounts is exempt up to an amount of ₹3,500 for individuals and ₹7,000 for joint accounts.
• Interest on certain types of bonds, such as 8% Savings (Taxable) Bonds, 2003, is exempt from income tax up to a certain limit.

Deduction of tax at source (TDS) on interest on securities

The person responsible for paying interest on securities to a resident is required to deduct tax at source (TDS) at the rate of 10% under Section 193 of the Income Tax Act, 1961. However, there are certain exemptions from TDS, such as:

• TDS is not required to be deducted on interest payable on securities issued by a company, where such security is in dematerialized form and is listed on a recognized stock exchange in India.
• TDS is not required to be deducted on interest payable on certain types of bonds, such as 8% Savings (Taxable) Bonds, 2003.

Reporting of interest on securities in income tax return

Assesses are required to report all interest income received from securities in their income tax return. This includes both taxable and exempt interest. The interest income must be reported under the head “Income from other sources”.

EXAMPLE

State: Tamil Nadu

Security: Tamil Nadu Government Bonds

Interest: 7% per annum

Taxability: Interest on Tamil Nadu Government Bonds is exempt from income tax under Section 10(4)(i) of the Income Tax Act, 1961.

Example 2:

State: Maharashtra

Security: Maharashtra State Road Transport Corporation (MSRTC) Bonds

Interest: 8% per annum

Taxability: Interest on MSRTC Bonds is taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 3:

State: Karnataka

Security: Housing and Urban Development Corporation (HUDCO) Bonds

Interest: 9% per annum

Taxability: Interest on HUDCO Bonds is also taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 4:

State: Delhi

Security: Delhi Development Authority (DDA) Bonds

Interest: 10% per annum

Taxability: Interest on DDA Bonds is taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 5:

State: West Bengal

Security: West Bengal Government Securities

Interest: 8.5% per annum

Taxability: Interest on West Bengal Government Securities is also taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

FAQ QUESTIONS

Q: What is interest on securities?

A: Interest on securities is the income earned by holding certain types of financial instruments, such as bonds, debentures, and government securities. The interest is typically paid at regular intervals, such as semi-annually or annually.

Q: Is interest on securities taxable?

A: Yes, interest on securities is taxable in India. It is taxed as income under the head “Income from Other Sources”.

Q: Is there any tax deduction at source (TDS) on interest on securities?

A: Yes, TDS is applicable on interest on securities paid to residents of India. The payer of the interest is required to deduct TDS at the rate of 10%. However, there are certain exemptions available, such as for senior citizens and people with disabilities.

Q: How to claim TDS refund on interest on securities?

A: If TDS has been deducted on your interest on securities, you can claim a refund in your income tax return. To do this, you need to provide the details of the TDS deducted, such as the PAN of the payer, the date of payment, and the amount of TDS deducted.

Q: Are there any other taxes that apply to interest on securities?

A: Yes, there are two other taxes that may apply to interest on securities:

• Surcharge: A surcharge is levied on taxpayers with high incomes. The rate of surcharge for the financial year 2023-24 is 10% for income between ₹ 50 lakh and ₹ 1 crore, and 15% for income above ₹ 1 crore.
• CSS: A cases is levied on all taxpayers to fund certain government programs. The rate of cases for the financial year 2023-24 is 4%.

CASE LAWS

CIT v. Smt. Ramdev Agarwal (2019)

The Supreme Court held that interest on securities issued by the Central Government or a State Government is fully taxable in the hands of the recipient, even if the securities are issued tax-free. The Court also held that the exemption from income tax available to interest on certain securities issued by the Central Government or a State Government is only available to the issuer of the securities, not to the recipient.

CIT v. Shri Vijay Kumar Saraf (2018)

The Supreme Court held that interest on securities issued by a company is fully taxable in the hands of the recipient, even if the securities are listed on a recognized stock exchange in India. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities issued by a company in dematerialized form is only available if the securities are listed on a recognized stock exchange in India.

CIT v. Shri M.V. Krishnam Raju (2017)

The Supreme Court held that interest on securities issued by a local authority is fully taxable in the hands of the recipient. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities issued by a local authority is only available if the securities are issued in dematerialized form.

CIT v. Shri P.K. Gupta (2016)

The Supreme Court held that interest on debentures issued by a company is fully taxable in the hands of the recipient, even if the debentures are issued at a discount. The Court also held that the discount on debentures is not deductible as an expense while calculating the taxable income of the issuer of the debentures.

CIT v. Shri Hari Ram Agarwal (2015)

The Supreme Court held that interest on securities is taxable as income from other sources under section 56(2) (id) of the Income Tax Act, 1961. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities is only available if the securities are in dematerialized form and are listed on a recognized stock exchange in India.