Interest on securities (Section 2(28B))

Not every receipt called interest is interest on securities. The Act defines the phrase narrowly, and the definition decides which computation applies.

Section 2(28B) covers two things. Interest on any security of the Central Government or a State Government. And interest on debentures or other securities for money issued by or on behalf of a local authority, a company, or a corporation established by a Central, State or Provincial Act.

So a government bond coupon is interest on securities. So is a company debenture coupon. A bank fixed deposit is not — a deposit is not a security.

This income is taxed under income from other sources, unless it is business income in the taxpayer's hands.

One oddity is worth knowing. The Income Tax Act does not define security at all, so the workbook borrows the meaning from the Securities Contracts (Regulation) Act, 1956.

The two limbs of the definition.

What counts as a security. The word is not defined in the Income Tax Act, so the reference is taken from Section 2(h) of the Securities Contracts (Regulation) Act, 1956. On that basis the workbook lists bonds, debentures or debenture stock, security receipts, government securities, and a pooled investment vehicle.

When the income arises — Section 145. Interest on securities is computed on the method of accounting the assessee regularly employs. The Act allows two.

So the same coupon can fall into two different previous years for two different taxpayers, purely on their regular accounting method.

The computation. The workbook gives a proforma with generic xxx amounts:

Exemptions sit outside the definition. Section 10 exempts certain interest incomes, and the workbook sends the reader to its Annexure 2 rather than listing them in the chapter.

One numbering warning. The workbook prints the computation sub-heading as 9.1-1 although it sits inside section 9.3. That is a typesetting slip in the paper, not a separate section.

Illustrative figures; the workbook's own proforma prints xxx amounts.

Mrs Bhattacharya holds three interest-bearing investments in FY 2024-25:

Interest on securities for the year is 71,800 + 72,000 = Rs 1,43,800. The Rs 35,000 of deposit interest is still income from other sources, but it is not interest on securities and it does not enter this computation.

Her computation. She pays her bank Rs 2,500 in collection charges and has no borrowings.

Now change her accounting method. The company debenture pays its coupon on 15 April. Under the mercantile system the Rs 72,000 accrues across FY 2024-25 and is taxed in that year. Under the cash system it is taxed in FY 2025-26, when the money actually arrives. Same debenture, same coupon, two different previous years.

And note what the definition excludes. Had she held a corporate fixed deposit instead of the debenture, the Rs 72,000 would have been ordinary interest and not interest on securities — so the collection charges attached to it would have had to be justified as wholly-and-exclusively expenditure on their own footing.

Chapter 9 (Income from Other Sources), section 9.3, gives the Section 2(28B) definition, the meaning of security drawn from Section 2(h) of the Securities Contracts (Regulation) Act, 1956, the Section 145 basis of charge, and the computation proforma. Chapter 9 is short, which makes every paragraph in it examinable.

Expect a definition question distinguishing interest on securities from ordinary interest, a basis-of-charge question on accrual against receipt, and a computation question using the three permissible deductions. The Section 10 exemptions are sent to Annexure 2, so a question on them is an annexure question, not a chapter question.

• A bank or corporate deposit is not a security. Interest on it is income from other sources, but not interest on securities under Section 2(28B).
• Security is not defined in the Income Tax Act. The meaning comes from Section 2(h) of the Securities Contracts (Regulation) Act, 1956 — a favourite one-line question.
• Limb (b) needs a specific issuer. A local authority, a company, or a corporation established by a Central, State or Provincial Act. An ordinary partnership firm issuing a promissory note is not covered.
• Accrual or receipt depends on the assessee's regular accounting method, not on the taxpayer's choice year by year.
• The income sits under other sources only if it is not business income. For a dealer in securities the same coupon is business income.
• Do not confuse this with a coupon rate or with accrued interest on a sale. Section 2(28B) classifies the income; the instrument's coupon is a feature of the security.
• The proforma sub-heading is printed as 9.1-1 inside section 9.3. There is no separate section 9.1 computation.