Attributable expenses

Income from other sources is a residual head — everything not chargeable under salary, house property, business or capital gains lands here. Like the other heads, it is not taxed on the gross amount received. Certain costs of earning that income can be deducted first.

The workbook calls these attributable expenses: the last line item in the standard computation of income from other sources, deducted after all the specific items of income — dividend, winnings, interest on securities and the rest — are added up.

The workbook's computation format for income from other sources lists fourteen types of income (dividend, lottery winnings, interest on securities, rental income from plant or machinery, and so on), then a single deduction line: "Less: Attributable expenses", before arriving at the final figure.

For interest on securities specifically, the permissible deductions are named:

• Collection charges
• Interest on borrowings obtained to purchase the securities
• Any other revenue expenditure laid out or expended wholly and exclusively for the purpose of earning that income

For dividend income, the deduction is narrower and capped: a resident shareholder may claim interest expenditure incurred to earn the dividend, but only up to 20% of the total dividend income. No other expense — including commission or remuneration paid to a banker or agent to realise the dividend — is deductible. A non-resident shareholder gets no deduction at all against dividend income, and cannot claim Chapter VIA deductions (Sections 80C to 80U) against it either, even under the old tax regime.

Mr A, resident in India, invested Rs 50,00,000 in debt-oriented mutual funds and received a dividend of Rs 5,00,000. He paid Rs 1,50,000 in interest on money he had borrowed to make the investment.

Dividend received                          5,00,000
Maximum deductible interest (20% of 5,00,000)  1,00,000
Actual interest paid                        1,50,000
Allowed as attributable expense = lower of the two = 1,00,000
Taxable dividend income = 5,00,000 - 1,00,000 = 4,00,000

Even though Mr A actually paid Rs 1,50,000 in interest, only Rs 1,00,000 — the 20% cap — is deductible as an attributable expense; the remaining Rs 50,000 simply cannot be claimed.

Had Mr A been a non-resident, none of the Rs 1,50,000 would have been deductible at all: the entire Rs 5,00,000 dividend would be taxed at 20% (subject to DTAA relief), with no attributable expenses and no Chapter VIA deductions permitted against it.

Chapter 9 (Income from Other Sources), section 9.1 (the computation format) and section 9.3.3 (permissible deductions from interest on securities), plus the 20%-cap rule for dividend (stated in sections 10.3.3 and 11.2.2), all sit under the umbrella of attributable expenses. Expect a computation question applying the 20% dividend cap, or listing what can and cannot be deducted from interest on securities.

• The dividend deduction is capped at 20% of the dividend, regardless of how much interest was actually paid — the lower of the two figures applies.
• Only interest is deductible against dividend income — commission, collection charges or any other cost of realising the dividend is expressly disallowed.
• A non-resident gets zero deduction against dividend income, and no Chapter VIA relief either.
• "Wholly and exclusively" is the test for interest on securities — a mixed-purpose expense does not qualify in full.