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Direct Tax Laws & International Taxation · Income from Other Sources

Interest on Compensation, Securities and Other Special Incomes (CA Final DT)

Updated 5 October 2026 · Fact-checked

Interest on enhanced compensation, interest on securities, rent from letting machinery, plant or furniture, and sub-letting income fall under income from other sources when they are not business income. Enhanced compensation interest is taxed in the year of receipt with a flat 50% deduction. The others allow only specified expenses. Fix the head first, then compute.

Understand Interest on Compensation, Securities and Other Special Incomes

This page follows the Income-tax Act, 2025 and its terms, such as tax year, for tax year 2026-27.

Income from other sources is the residual head. Income is taxed here only if it is chargeable to tax, is not exempt, and does not belong to salary, house property, business or capital gains. So the first question in every problem is: does this income belong to a better-fitting head?

Interest on enhanced compensation is interest received on compensation or enhanced compensation, for example when the State compulsorily acquires your property and later raises the compensation. It is taxed in the year you receive it, not in the years it relates to. You get one deduction only: 50% of the interest. No other expense, such as legal fees, is allowed against it.

Interest on securities means interest on government securities, bonds and debentures. If you hold them as an investment, the interest is taxed here. If you hold them as stock-in-trade, or the interest is part of a financial business, it is business income. The deduction is the commission or remuneration paid to a banker or other person for realising the interest. Other expenditure is allowed only as the Act permits. The 50% flat deduction does not apply to it. Whether any particular interest is exempt depends on the specific exemption provisions of the Act, so check the facts for an exemption before you tax it.

Letting of machinery, plant or furniture gives rent. If the letting is not your business, the rent is taxed here. If you let a building together with the machinery, plant or furniture, and the rent of the two is inseparable, the whole rent is taxed here as income from other sources, provided the letting is not your business. Deductions allowed are current repairs, insurance premium, depreciation and, where applicable, other expenditure incurred wholly and exclusively to earn the rent.

Sub-letting: a tenant who sub-lets a house is not the owner, so the income is not house property income. It is taxed here. You may deduct the rent you pay to the owner, plus other expenses incurred wholly and exclusively to earn the sub-letting income. The 30% standard deduction available to owners does not apply.

Key rules to remember

Interest on enhanced compensation
Taxable = Interest received − 50% of interest received
Taxed in the year of receipt, whichever year it relates to. No other deduction is allowed.
Interest on securities
Taxable = Interest chargeable − commission or remuneration paid for realising it − other expenditure (only as the Act permits)
Applies only if the interest is not business income. The commission or remuneration must be paid to a banker or other person for realising the interest. Check the specific exemption provisions before taxing. No 50% deduction.
Rent from machinery, plant or furniture
Taxable = Rent − current repairs − insurance premium − depreciation − other expenditure wholly and exclusively for earning the rent (where applicable)
Applies if not business income. If let with a building and the rent is inseparable, the whole rent is taxed under income from other sources.
Sub-letting income
Taxable = Sub-letting rent − rent paid to the owner − other expenses incurred wholly and exclusively for earning it
No standard deduction. The sub-lessor is not the owner, so this is not house property income.
Head test
Business income > other sources if the activity is a business; other sources is the residual head
Always decide the head before applying deductions.

How to solve Interest on Compensation, Securities and Other Special Incomes questions

Use this order for any question on special incomes under the residual head.

  1. 1Identify the receipt: enhanced compensation interest, interest on securities, machinery or furniture rent, or sub-letting rent.
  2. 2Check whether the income is exempt or already taxable under salary, house property, business or capital gains. Business use of the asset or securities settles it.
  3. 3If it is interest on enhanced compensation, tax it in the year of receipt, whichever years it relates to.
  4. 4Apply the correct deduction: 50% for compensation interest; for the others, only the permitted expenses.
  5. 5For machinery, plant or furniture, deduct current repairs, insurance premium, depreciation and, where applicable, other expenditure wholly and exclusively for earning the rent. If a building is let with it and the rent is inseparable, treat the whole rent here.
  6. 6For sub-letting, deduct the rent paid to the owner and other expenses incurred wholly and exclusively for the sub-letting. Do not claim the 30% standard deduction.
  7. 7Add the net amount to income from other sources, then carry it to gross total income.

Quickest way: Four-line head and deduction check

When to use it: Use for short MCQs and when a long computation question gives many mixed receipts.

  1. Ask: business or investment? If business, leave this topic.
  2. Compensation interest: take 50% of the receipt, nothing else.
  3. Securities, machinery rent, sub-letting: receipts less only the permitted expenses.
  4. Sub-letting: deduct rent paid to the owner; never the 30% standard deduction.

Common mistakes in Interest on Compensation, Securities and Other Special Incomes

  • Allowing legal expenses against interest on enhanced compensation

    Students assume all expenses are allowed against a receipt under this head.

    Fix: Remember that the only deduction is a flat 50%. Any other cost is ignored.

  • Spreading enhanced compensation interest over the years it relates to

    Students apply the accrual logic used for ordinary interest.

    Fix: State clearly that it is taxed in the year of receipt, in full.

  • Taxing sub-letting rent under house property

    The asset is a house, so the head seems obvious.

    Fix: The sub-lessor is not the owner, so the income is under other sources. Do not apply the 30% standard deduction.

  • Taxing interest on securities under this head when held as stock-in-trade

    Students see the word 'interest' and stop reading the facts.

    Fix: Check whether securities are held as investment or trading stock. The latter is business income.

  • Forgetting depreciation on machinery let out

    Students treat it as a pure rent receipt.

    Fix: When machinery, plant or furniture is let and the income is not business income, depreciation is a permitted deduction, along with current repairs and insurance premium.

  • Treating compensation interest as part of the compensation itself

    Both are received from the same authority, so students lump them together.

    Fix: Compensation for the transfer of the asset is a capital matter. Only the interest on enhanced compensation is taxed here.

Worked examples

Example 1

Under the Income-tax Act, 2025, Mr Anil's land was compulsorily acquired by the State. In tax year 2026-27 he received ₹10,00,000 as interest on enhanced compensation. ₹4,00,000 of this relates to earlier years. He paid ₹50,000 to a lawyer for the claim. Find the amount taxable under income from other sources.

Show the solution
  1. Under the Income-tax Act, 2025, interest on enhanced compensation is taxed in the tax year of receipt.
  2. The full ₹10,00,000 is taxed in tax year 2026-27, including the ₹4,00,000 relating to earlier years.
  3. The only deduction is 50% of the interest: 50% × ₹10,00,000 = ₹5,00,000.
  4. The legal fee of ₹50,000 is not allowed.

Answer: ₹5,00,000 is taxable under income from other sources for tax year 2026-27.

Example 2

Ms Meera has taken a flat on rent of ₹30,000 a month, paid for 12 months. She sub-lets it for the full year at ₹50,000 a month. She spent ₹20,000 on repairs for the sub-let flat, incurred wholly and exclusively to earn the sub-letting income. She also let out machinery (not her business) for ₹1,80,000 a year, with depreciation of ₹40,000 and insurance of ₹5,000. Compute her income from other sources.

Show the solution
  1. Sub-letting is taxed under other sources as she is not the owner.
  2. Sub-letting rent: ₹50,000 × 12 = ₹6,00,000.
  3. Rent paid to the owner: ₹30,000 × 12 = ₹3,60,000.
  4. Net sub-letting income: ₹6,00,000 − ₹3,60,000 − ₹20,000 = ₹2,20,000. The repairs are allowed because they were incurred wholly and exclusively for the sub-letting. No standard deduction.
  5. Machinery letting is not her business, so it falls under other sources: ₹1,80,000 − ₹40,000 − ₹5,000 = ₹1,35,000.
  6. Total: ₹2,20,000 + ₹1,35,000 = ₹3,55,000.

Answer: Income from other sources is ₹3,55,000.

Exam tips

  • Start every answer by stating the head and why. Markers give separate credit for 'taxable as income from other sources, not house property or business'.
  • Write 'taxed in the year of receipt' next to enhanced compensation interest. It is a frequent one-mark point.
  • In case-scenario MCQs, look for words such as 'stock-in-trade', 'owner' and 'let along with building'. They decide the head.
  • Show the deduction line by line in written answers. Partial marks depend on each step.
  • Do not apply the 30% standard deduction anywhere in this topic; the examiner often sets it as a trap.

Practice questions from Income from Other Sources

Interest on Compensation, Securities and Other Special Incomes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Interest on Compensation, Securities and Other Special Incomes: frequently asked questions

Is interest on enhanced compensation taxable in the year it relates to?

No. It is taxed in the year you receive it, whichever years it covers. You get a deduction of 50% of the interest and nothing else.

Under which head is rent from letting machinery, plant or furniture taxed?

It is taxed under income from other sources unless the letting is your business, in which case it is business income. If a building is let along with them and the rent cannot be separated, the whole rent is taxed under income from other sources, unless the letting is your business.

Under which head is sub-letting income taxed?

It is taxed under income from other sources, because the sub-lessor is not the owner of the house. You can deduct the rent you pay to the owner and other expenses incurred wholly and exclusively for earning it, but not the 30% standard deduction.

When is interest on securities taxed under other sources?

When it is not business income. If you hold the securities as an investment, the interest comes under this head. The deduction is the commission or remuneration paid to a banker or other person for realising it, and other expenditure only as the Act permits. If the securities are stock-in-trade, it is business income.