Collection charges
A deduction allowed against gross interest from securities when computing taxable income from other sources, alongside interest on borrowed money and other expenses incurred to earn that income.
In plain language
Interest earned on securities held as an investment is taxed under income from other sources. But the taxable figure is not the gross interest received — certain costs of earning that interest can be deducted first, and collection charges are one of them.
How it works
The workbook's computation for taxable interest on securities is a short subtraction:
Gross interest from securities xxx
Less: Permissible deductions
(a) Collection charges (xxx)
(b) Interest on borrowings obtained to purchase the securities (xxx)
(c) Any other revenue expenditure laid out or expended wholly
and exclusively for earning such income (xxx)
Taxable income from securities xxx
Collection charges sit alongside two other permissible deductions: the interest cost of any loan taken to buy the securities, and any other revenue expenditure incurred wholly and exclusively to earn the interest income. All three reduce the gross figure before it is added to the assessee's total income, and taxed at the rate applicable to that assessee — Section 145 governs whether the income is recognised on an accrual (mercantile system) or receipt (cash system) basis, depending on the accounting method the assessee regularly follows.
A worked example
Illustrative figures.
Mrs Kapadia holds a portfolio of listed debentures as an investment, earning gross interest of Rs 3,00,000 in a year. Her bank charges her Rs 4,500 for collecting and crediting the periodic interest payments on her behalf — a collection charge. She also pays Rs 60,000 of interest on a loan she took specifically to buy some of these debentures.
Gross interest from securities Rs 3,00,000
Less: Collection charges Rs 4,500
Less: Interest on borrowings to buy securities Rs 60,000
Taxable income from securities Rs 2,35,500
Only the Rs 2,35,500 net figure is added to her total income under "income from other sources" — not the full Rs 3,00,000 she actually received.
Why NISM asks about it
Chapter 9 (Income from Other Sources), section 9.1-1, "Computation of taxable income," lists collection charges as the first of three permissible deductions from gross interest on securities. Expect a computation question netting gross interest against collection charges, loan interest and other allowable expenses.
Common exam traps
- Collection charges are deducted from gross interest, not added to it — a straightforward subtraction, but easy to misread under time pressure.
- All three deductions must be for earning the interest income specifically — a general, unrelated expense does not qualify as "wholly and exclusively" for this purpose.
- This computation applies only when interest income is not already business income — a securities dealer holding them as stock-in-trade is taxed differently, under profits and gains of business or profession.
- Do not confuse with attributable expenses, the general deduction line used elsewhere in the income-from-other-sources computation — collection charges is the specific deduction named for interest on securities.
Check yourself
1.Which of the following is a permissible deduction from gross interest on securities?
- a)Securities Transaction Tax paid on the purchase of the securities
- b)Interest on borrowings obtained to purchase the securities
- c)Capital expenditure incurred on acquiring the securities
- d)A general annual portfolio management fee covering all the client's assets
Show the answer
Answer: (b) Interest on borrowings obtained to purchase the securities
The three permissible deductions are collection charges, interest on borrowings obtained to purchase securities, and any other REVENUE expenditure laid out or expended WHOLLY AND EXCLUSIVELY for the purpose of earning such income. Capital expenditure does not qualify, and a general fee covering many purposes struggles to meet the "wholly and exclusively" test — the same difficulty the workbook notes for adviser fees under capital gains.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Attributable expensesThe expenses a taxpayer may deduct while computing income from other sources — collection charges, interest on borrowed funds and similar costs incurred wholly and exclusively to earn that income.
- Composite rental incomeRent received for letting out plant, machinery or furniture together with a building — taxed under income from other sources, as a separate line from renting the equipment alone.
- Twenty per cent dividend deduction capA resident may set only interest expenditure against dividend income, and only up to 20% of the total dividend for the year; no other expense is allowed, and a non-resident gets no deduction at all.