Taxation · Income from Other Sources

Interest on Securities and Other Interest Income

Updated 5 October 2026 · Fact-checked

Interest on securities, bank deposits and loans is taxed under Income from Other Sources unless it is part of your business income. Add the gross interest, then deduct only what the law allows: commission for realising interest on securities, other expenditure wholly and exclusively incurred to earn it, and a flat 50% on enhanced compensation interest.

Understand Interest on Securities and Other Interest Income

Interest is a return for lending money. Tax law does not give it a head of its own. If you earn interest and it is not business income, it is taxed under Income from Other Sources, the residuary head.

Interest on securities means interest on government securities, debentures, bonds and similar instruments. Interest on bank FDs, recurring deposits, savings accounts, loans to friends or relatives, and inter-corporate deposits is also taxed under this head when you are not in the business of lending or investing.

The first question is always the head. If the securities are stock-in-trade of a dealer, or you run a money-lending or finance business, the interest is business income. If a business keeps a deposit only because it needs it for its business (for example, as margin for a bank guarantee), the interest is generally business income. If a business simply parks surplus funds, the interest is generally Other Sources. Look for the link to the business activity.

The second question is when it is taxed. Under this head, interest is taxed according to the method of accounting you regularly follow, cash or mercantile. The exception is interest received on enhanced compensation, which is taxed in the year you receive it, whatever method you follow.

The third question is how much. Start with gross interest. TDS is not deducted from income. It is only credited against your tax later. Then apply the deductions that fit the type of interest.

Interest on securities: you can deduct a reasonable commission or remuneration paid for realising it, and any other expenditure (not being capital expenditure) incurred wholly and exclusively to earn it. Interest on money borrowed to buy the securities falls within this other expenditure if it meets that test.
Other interest (bank FD, loan, deposit): the collection-commission deduction is limited to interest on securities. For this interest, only expenditure (not being capital expenditure) laid out wholly and exclusively to earn that interest is allowed. Do not assume that borrowing cost is allowed. You must be able to show that it was incurred wholly and exclusively to earn that interest.
Interest on enhanced compensation: a flat 50% deduction and no other deduction.

Personal and capital expenses are never allowed. A separate rule limits interest on borrowed capital claimed against dividend income and income from units to 20% of that income. That is a different topic, so do not apply it here.

Deductions for savings-account interest are different. They are among the Chapter VI-A-equivalent deductions under the Income-tax Act, 2025, claimed from gross total income and available only under the old regime. They are not part of the Other Sources computation, so do not subtract them while computing this head.

Key rules to remember

Net interest on securities: Gross interest on securities − reasonable commission or remuneration for realising it − any other expenditure (not being capital) incurred wholly and exclusively to earn it (this includes interest on money borrowed for the purpose); Deduct only expenses that have a direct link to earning this income. The commission deduction applies only to interest on securities. Do not deduct personal or capital expenses. The 20% limit on interest on borrowed capital applies to dividend and unit income, not here.
Interest on enhanced compensation: Taxable amount = Interest received × 50%; The 50% deduction is flat and applies only to interest received on enhanced compensation. No other deduction is allowed against it. It is taxed in the year of receipt, not spread over earlier years.
Interest on bank deposits and loans: Taxable amount = Gross interest − expenditure (not being capital) laid out wholly and exclusively to earn it, if any; Only expenditure, not being capital expenditure, laid out wholly and exclusively to earn the interest is allowed. Include TDS in the gross amount. The collection-commission deduction is for interest on securities only. Deduct borrowing cost only if the question states or supports that it was incurred wholly and exclusively to earn this interest. Any Chapter VI-A-equivalent deduction is separate and is claimed later from gross total income.
Head test for interest: Interest linked to a business activity or held as stock-in-trade → Business income; otherwise → Income from Other Sources; Temporary parking of surplus funds is generally Other Sources. Funds that are needed for the business, such as margin money, generally point to Business income.

How to solve Interest on Securities and Other Interest Income questions

Use this order for any question on interest income. It covers the head, the timing and the deductions.

1List every interest item in the question: securities, FDs, savings, loans, enhanced compensation, tax refund. Ignore tax-free items, which are exempt.
2For each item, decide the head. Is the assessee a dealer or lender, or is the deposit needed for the business? If yes, it is business income. If not, it is Other Sources.
3Check the timing. For interest on enhanced compensation, tax it in the year of receipt. For other interest, follow the assessee's method (cash or mercantile) and watch whether it is due or received.
4Take the gross amount. If the question gives net-of-TDS interest, gross it up first.
5Apply the deductions by type. Interest on securities: commission for realising it, plus other expenditure (not being capital) incurred wholly and exclusively to earn it (this includes interest on money borrowed for the purpose). FD or loan interest: only expenditure (not being capital) laid out wholly and exclusively to earn that interest; allow an expense only if the question shows that link. Enhanced compensation interest: a flat 50%.
6Do not deduct personal or capital expenses. Do not apply any deduction that the question does not support.
7Total the net amounts under Other Sources, state the answer clearly, and note that the business items go to the business head.

Quickest way: One-line-per-item table method

When to use it: Use this for MCQs and for written answers with several interest items.

MCQs: first check the status of the assessee. A dealer or lender means business income. Eliminate every option that puts that interest under Other Sources.
MCQs: if the item is interest on enhanced compensation, take 50% of the receipt. Eliminate options with 100% or with extra deductions.
MCQs: if TDS appears, check that the amount is grossed up before you deduct anything.
Written: write one line per item: item, gross, deduction, net. Examiners give a mark for each correct line even if the total is wrong.
Written: close with a total line and one sentence for each head decision, such as 'surplus funds, so Other Sources'.

Common mistakes in Interest on Securities and Other Interest Income

Taxing the net amount after TDS as the income.
Students treat TDS as a deduction like an expense.
Fix: Taxable income uses the gross interest. TDS is a prepaid tax credited at the end of the computation.
Allowing a deduction for personal expenses against interest income.
Students assume any expense linked to the investment is allowed.
Fix: Allow only reasonable commission for realising interest on securities and other expenditure incurred wholly and exclusively to earn the income (for interest on securities, this includes interest on money borrowed for the purpose). Personal and capital expenses are not allowed.
Deducting expenses other than the flat 50% from interest on enhanced compensation.
Students apply the standard Other Sources deductions to every item.
Fix: Interest on enhanced compensation gets a flat 50% deduction only. No other deduction is allowed.
Putting interest on a business's surplus funds under business income, or the reverse.
Students read 'company' and assume business income.
Fix: Test the link. Interest on funds needed for business operations is generally business income. Interest on idle surplus is Other Sources.
Taxing interest on enhanced compensation on an accrual basis or across earlier years.
Students reason that the interest relates to past years.
Fix: Tax it in full (after the 50% deduction) in the year you receive it.
Subtracting a savings-account interest deduction while computing Other Sources income, or applying it under the new regime.
Students remember the deduction and treat it as an expense against interest, without checking that it is a Chapter VI-A-type deduction.
Fix: Compute Other Sources income without it. The savings-interest deduction is claimed from gross total income, only under the old regime, and only if the question asks for deductions.

Worked examples

Example 1

Mr Arun is a resident individual, tax year 2026-27, with no business activity in this matter. He received: (a) interest on listed debentures of ₹80,000 (gross); (b) FD interest of ₹30,000; (c) interest of ₹1,00,000 on enhanced compensation for land acquired in an earlier year. He paid ₹2,000 to his bank as commission for collecting the debenture interest and ₹10,000 as interest on a loan taken wholly and exclusively to buy the debentures. Compute his income from Other Sources, ignoring any Chapter VI-A deduction.

Show the solution

Interest on securities: the loan interest of ₹10,000 was incurred wholly and exclusively to earn the debenture interest, so it is allowed as other expenditure.
Net interest on securities: gross ₹80,000 − commission ₹2,000 − interest on borrowed money ₹10,000 = ₹68,000.
FD interest: Mr Arun is not in business, so this is Other Sources. No expenditure incurred to earn it is mentioned, so nothing can be deducted and the taxable amount is ₹30,000.
Interest on enhanced compensation: ₹1,00,000 × 50% = ₹50,000 after the flat deduction. It is taxed in the year of receipt.
Total: ₹68,000 + ₹30,000 + ₹50,000 = ₹1,48,000.

Answer: Income from Other Sources = ₹1,48,000.

Example 2

ABC Traders, a trading firm, earned the following in tax year 2026-27: (a) interest of ₹40,000 on an FD kept with the bank as margin for a bank guarantee required for its business; (b) interest of ₹25,000 on an FD of idle surplus funds. It paid ₹18,000 as interest on a loan taken to make this surplus FD. Assume the loan was taken wholly and exclusively to earn the interest on this surplus FD. No other expenses relate to the margin deposit. State the head and amount for each item.

Show the solution

Item (a): interest on margin-money deposits is generally treated as business income where the deposit is needed for the business, as here for the bank guarantee. Since no related expenses are given, the net amount is the full ₹40,000, which goes to the business head.
Item (b): the funds are idle surplus and not part of operations, so the interest is Other Sources.
For this interest, only expenditure (not being capital) laid out wholly and exclusively to earn it is allowed. The question tells us to assume that the loan interest of ₹18,000 was incurred wholly and exclusively to earn this FD interest, so it is allowed.
Other Sources: ₹25,000 − ₹18,000 = ₹7,000. If the question did not give this assumption, the loan interest could not be taken as allowed and the amount would be ₹25,000.
The loan interest is not claimed against business profit. The allowed ₹18,000 is set against the Other Sources interest.

Answer: Business income: ₹40,000 (included in profits). Income from Other Sources: ₹7,000, on the assumption that the loan was taken wholly and exclusively to earn the FD interest.

Exam tips

Read for the status of the assessee first. Words such as 'dealer', 'money lender' or 'stock-in-trade' change the head.
When TDS is given, gross up the amount and write that you have done so. This secures a mark and avoids the net-of-TDS trap.
Treat interest on enhanced compensation as its own line. Show 50% with no other deduction, and note that it is taxed in the year of receipt.
For MCQs, test the exact condition first, such as surplus funds or margin money, then compute. Two options usually differ only on the head or on the deduction.
In a comprehensive total-income problem, keep a separate Other Sources schedule so the interest items are not mixed with business income. Claim Chapter VI-A-type deductions only after gross total income.

Practice questions from Income from Other Sources

Interest on Securities and Other Interest Income 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 Securities and Other Interest Income: frequently asked questions

Is interest on a bank FD always taxed under Income from Other Sources?

No. For an individual with no related business it is Other Sources. If the assessee is a lender or the deposit is needed for the business, such as margin for a guarantee, the interest is generally business income.

What deductions are allowed against interest on securities?

You can deduct a reasonable commission or remuneration paid for realising the interest. You can also deduct any other expenditure (not being capital) incurred wholly and exclusively to earn it, which includes interest on money borrowed for that purpose. Personal and capital expenses are not allowed.

How is interest on enhanced compensation taxed?

It is taxed in the year you receive it. A flat 50% deduction is allowed and no other deduction. The remaining 50% is added to income from Other Sources. This treatment is only for interest on enhanced compensation.

Does TDS reduce my taxable interest income?

No. Include the gross interest in income. TDS is only a tax already paid and is credited against your final tax liability.

Is the savings account interest deduction available under the new tax regime?

No. It is a Chapter VI-A-equivalent deduction under the Income-tax Act, 2025, available only under the old regime. It is claimed from gross total income and is not part of the Other Sources computation. If the question says the assessee follows the new regime, do not apply it.