What is Gross up of Interest on Securities?
The tax on interest on securities is also to be deducted at source at the given tax rates. The gross amount of interest is taxed from the income tax point of view. If what is given is the net interest, it has to be grossed up to calculate the taxable amount of the assessee. In case of government securities, apart from 8% Saving bonds which are taxable, there is no need to gross up as tax has not been deducted at source. Grossing up is needed in case of the following securities:
- 8% saving bonds which are taxable bonds need grossing up if the interest payable is more than Rs. 10,000.
- Securities issued by a statutory corporation or a local authority or by any company.
Net interest can be grossed up as per the following formula (Current):
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Net interest x 100/ 100-TDS
The rates of TDS are (i) 10% in case of 8% saving bonds and (ii) 10% in case anon-government securities listed or not listed at the stock exchange. No tax is deductible on debentures that have been issued by a widely held company if the interest has been paid or is payable to an individual, resident in India and the aggregate amount of such interest paid or payable during the financial year does not exceed Rs. 2,500.
The following are the rules for grossing up interest on securities:
- If the rate of interest is given, only the interest of tax-free commercial securities is grossed up and interest on all other securities is not grossed up.
- Interest on tax-free commercial securities is always grossed up. whether its rate per cent is given or the amount received is given.
- Interest on less tax securities is grossed up only when the amount received is given.
It has to be noted that the taxable income from interest on securities is (i) net interest received by the security-holder plus (ii) the amount of income tax deducted at source or paid by the authority responsible for paying the interest directly into the government treasury on behalf of the security-holder.