Income from other sources
The head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
In plain language
A PMS portfolio produces two broad kinds of return. The first is the rise in the value of what it holds — capital gains, taxed under their own rules. The second is money paid out along the way — interest from bonds and dividends from shares.
That second kind is taxed under the head income from other sources, at the investor's income tax slab rate.
The workbook applies this to both sides of a PMS portfolio. On the debt side, interest from bonds, debentures, fixed deposits or debt mutual funds is treated as income from other sources. On the equity side, dividends are taxable in the investor's hands as per their slab rate under Section 56 (Income from Other Sources).
How it works
Interest on debt investments (Chapter 11, section 11.2.1).
- Interest earned from bonds, debentures, fixed deposits or debt mutual funds is income from other sources, taxed at the applicable slab rate.
- Some debt instruments deduct TDS before crediting interest.
- In PMS, regular interest income is added to the investor's taxable income.
- No indexation or capital gains benefit applies to interest income.
Dividends from equity (section 11.2.2).
| Point | Workbook figure |
|---|---|
| Tax | Slab rate, under Section 56 |
| TDS by company | 10% on dividends exceeding ₹5,000 in a financial year |
| Revised TDS threshold | ₹10,000 from FY 2025-26 |
| Lower-slab investors | Can claim refunds while filing returns |
| In PMS | Investors receive dividends directly; added to taxable income |
NRIs (section 11.5.3). Dividend income taxable at applicable slab rates for NRIs, with 20% TDS; interest on NRO accounts taxable at 30% plus cess and surcharge.
Reporting (section 11.4). The portfolio manager's taxation report shows dividend income and interest income — interest reported separately — and Form 16A / TDS certificates are issued for tax deducted on dividends and interest. Quarterly reports go out within 30 days after each quarter, with an annual tax report at year end.
Contrast with capital gains. Equity STCG is taxed at a flat 20% and LTCG at 12.5% above ₹1.25 lakh; debt LTCG at 12.5% without indexation. Income from other sources has no special rate — it simply joins the investor's other income at slab rates.
A worked example
Illustrative investor and amounts; the TDS rates and thresholds are the workbook's.
Sneha, a resident PMS client, receives the following in her portfolio during the year:
| Income | Amount | Head |
|---|---|---|
| Interest on corporate bonds | ₹1,80,000 | Income from other sources — slab rate |
| Dividend from Company A | ₹45,000 | Income from other sources — slab rate |
| Dividend from Company B | ₹8,000 | Income from other sources — slab rate |
| Gain on shares sold after 18 months | ₹3,00,000 | Capital gains (LTCG), not other sources |
TDS on Company B's ₹8,000 dividend:
| Financial year | Threshold | TDS? |
|---|---|---|
| FY 2024-25 | ₹5,000 | ₹8,000 exceeds it → 10% = ₹800 |
| FY 2025-26 onward | ₹10,000 | ₹8,000 is below it → no TDS |
Company A's ₹45,000 exceeds either threshold, so ₹4,500 TDS is deducted. If Sneha's slab rate is lower than 10%, she can claim the excess back as a refund when filing her return.
The ₹1,80,000 of interest and ₹53,000 of dividends — ₹2,33,000 in all — are added to her taxable income at her slab rate. The ₹3,00,000 long-term gain is taxed separately under the capital gains rules.
Why NISM asks about it
Income from other sources appears in Chapter 11 (Taxation) for both debt interest (section 11.2.1) and equity dividends (section 11.2.2, Section 56), and again in the NRI section and the taxation report contents. For a PMS distributor, it explains why a high-income client's post-tax return from an income-oriented approach can be much lower than a growth-oriented one with the same pre-tax return.
Common exam traps
- Interest and dividends are taxed at slab rates, not at the flat capital gains rates.
- No indexation for interest income.
- Dividend TDS threshold changed within the workbook's own text: ₹5,000 up to FY 2024-25, ₹10,000 from FY 2025-26. Both appear; the key takeaways table mentions both.
- TDS is not the final tax — lower-slab investors can claim refunds.
- NRIs: 20% TDS on dividends, per section 11.5.3.
- Section 56 is the dividend head named in the workbook.
- Capital gains are a separate head. Do not add them to income from other sources.
Where this is taught
- Series X-B · Chapter 9: Income from Other Sourcesintroduced here
- Series XXI-A · Chapter 11: Taxationintroduced here
Related terms
- Long Term Capital GainThe gain on mutual fund units sold after the long-term holding period — 12 months for equity-oriented funds, 24 months for most others — taxed at 12.5% on equity funds above a Rs 1.25 lakh yearly exemption.
- Short Term Capital GainThe gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
- Post-tax returnReturn after taxes on investment income and realised capital gains: pre-tax return × (1 − tax rate). It is what matters to the investor, but performance is communicated pre-tax.
- TDS — Tax Deducted at SourceTax the bank deducts before crediting certain interest to you — absent on savings bank interest but charged on fixed and recurring deposit interest beyond a stipulated amount the workbook does not state.
- Form 16AThe TDS certificate a portfolio manager issues for tax deducted at source on a client's dividend and interest income, part of the regular tax reporting a PMS provider must give investors.
- Taxation reportThe periodic statement a portfolio manager must give every PMS client under Regulation 30, covering capital gains, derivatives income, dividends, interest and fees so the client can work out tax due.
- Keyman insuranceA life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
- Five heads of incomeEvery rupee of taxable income in India falls under one of five heads — salary, house property, business or profession, capital gains, or other sources — and total income is their sum.