Interest on Securities is taxable in India. Further, Section 193 of the Income Tax Act, 1961 provides for Tax Deduction at Source. This section casts responsibility on the person paying such interest on securities to a resident. The current rate of deduction is 10% for both domestic companies and resident non-corporate assesses.
Tax should be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.
Payments of interest for which tax is not deducted
- On 4.25% National Defence Bonds 1972, where the bonds are held by an individual not being a non-resident;
- On 2.25% National Defence Loan, 1968 or 4.67% National Defence Loan, 1972 where the interest is payable to an individual;
- On National Development Bonds;
- On 7 year National Saving Certificates (4th Issue);
- On 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980, where the bonds are held by an individual other than a non-resident. This exemption is available only when the holder of such bonds gives a declaration that the total nominal value of the bonds held by him or on his behalf did not, in either case, exceed ₹ 10,000 at any time during the period to which the interest relates. Here the nominal value is taken account and market value may exceed ₹ 10,000.
- On debentures issued by any institution or authority or any Public Sector Company or any co-operative society including a co-operative land mortgage bank or a co-operative land development bank, as notified by the Central Government;
- On any security of the Central Government or a State Government (interest payable on 8% Savings (Taxable) Bonds, 2003 is taxable);
- On any debentures whether listed or not listed on a recognised stock exchange that is issued by a company in which the public are substantially interested, to a resident individual or HUF. Conditions for exemption under this point are –
- The interest should be paid by the company by an account payee cheque;
- The amount of such interest or the aggregate thereof paid or likely to be paid during the financial year by the company to such resident individual or HUF should not exceed ₹5,000.
- On securities to LIC, GIC, subsidiaries of GIC or any other insurer, provided
- The securities are owned by them or
- They have a full beneficial interest in such securities.
- On any security issued by a company, where such interest is in dematerialised form and is listed on a recognised stock exchange in India.
In the above cases, the declaration shall be made by the recipient to the person responsible for paying such interest on securities. If a person entitled to receive such interest produces a certificate under section 197 from the Assessing Officer stating that his total income is either below the taxable limit or is liable to income-tax at a lower rate, the interest on securities should either be paid without any deduction of tax or with deduction at such mentioned lower rate, as the case maybe.
Where any income by way of interest on securities is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be the credit of such income to the account of the payee and tax has to be deducted at source. The account to which such interest is credited may be called “interest payable account” or “suspense account” or by any other name.
Filing of TDS Returns
Every person making a deduction of TDS on payment of interest on securities need to file a return in the form 26Q. Such return should contain –
- Details of payments made and tax deducted
- Payment of such tax deducted
- PAN of individuals to whom payment is made and tax is deducted
- In case PAN of the individuals to whom such payment is made is not available, the TDS should be deducted at 20% instead of 10%.
Effect on Tax Liability of Individuals whose TDS is deducted
Like, every other tax deduction for any other payments received, the TDS deducted under this section is ultimately adjusted with the net tax liability for the year. However, mere TDS deduction under this section doesn’t end up the liability to report income in the income-tax returns. Such individuals should file details on their income tax returns. It is needless to say that for any TDS deducted under this section or any other section, refunds on income tax can be claimed only when returns are filed.