Taxability of interest on securities
Interest on securities is taxable under the head ’Income from other sources’ if the same is not taxable as business income. If books of account in respect of such income are maintained on ’cash basis’, then the interest is taxable on ’receipt basis’. If, however, books of account are not maintained or are maintained on the basis of mercantile system of accounting, then interest on securities is taxable on ’accrual’ basis.
EXEMPT INTEREST - Interest on the following is exempt from tax :
- Interest on notified securities, bonds and certificates.
- The notified securities/bonds, etc., are : 12 - year National Savings Annuity Certificates; National Defence Gold Bonds, 1980; Special Bearer Bonds, 1991; Treasury Savings Deposit Certificates; Post Office Cash Certificates (5 years); National Plan Certificates (10 years); National Plan Savings Certificates (12 years); Post Office National Savings Certificates (12 years/7 years); Public Account of Post Office Savings Account Rules (interest up to Rs. 5,000); Post Office Saving Rules; Post Office CTD; Fixed Deposit [Government Savings Certificates (Fixed Deposit) Rules, 1968 or Post Office (Fixed Deposit) Rules, 1968]; Special Deposit Scheme, 1981 and Non-Resident (Non-Repatriable) Rupee Deposit Scheme.
- Interest to an individual and Hindu undivided family on 7 per cent Capital Investment Bonds
- Interest on notified bonds arising to non-resident Indians [i.e., NRI Bonds, and NRI Bonds (Second Series), issued by the State Bank of India].
- Interest on securities held by the Issue Department of the Central Bank of Ceylon.
- Interest payable to any foreign bank performing central banking functions outside India in respect of deposits made by such bank with any scheduled bank in India
- Interest on 9 per cent Relief Bonds, 1987 in the case of an individual or a Hindu undivided family.
- Interest on notified debentures of public sector companies
- Interest on deposits made in a notified scheme by a retired Government employee and an employee of a public sector company with effect from April 1, 1991 out of the money due to him on account of retirement. No tax liability under the Income-tax Act will arise on the amount payable to the nominee on the death of the depositor. Interest income of a spouse nominee after employee’s death is exempt if the nominee opts to continue the account. If the nominee is not the spouse of the depositor the amount lying to the credit of the depositor will devolve upon the nominee as a capital receipt on which no income-tax shall be payable at the time of devolution.