Chapter 7

Income from Interest on Security

Instructor: ATM Adnan

Assistant Professor
Department of Business Administration
Faculty of Business Studies
BGMEA University of Fashion and Technology (BUFT)
1
 “Meaning of Interest and Securities”

Generally the term “Interest” means the price that

someone pays for the temporary use of
someone else’s funds.
According to Section 2(38) of the ITO, 1984-
”Interest” means interest payable in any
manner in respect of any money borrowed or
debt incurred and includes any service fee or
other charge in respect of the money borrowed
or debt incurred or in respect of any credit
facility which has not been utilized.”

2
 “Meaning of Interest and Securities”

“Security is a document held by a creditor as

guarantee of his right to payment “

In other words securities are financial instruments

that represent a creditor relationship with a
corporation or government.

Generally, they represent agreements to receive a

certain amount depending on the terms
contained within the agreement.
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 Scope of “Income from Interest on
Securities”

As per Section 22, the following incomes of an

assessee shall be classified and computed
under the head “Interest on Securities”
(i) Interest receivable from any security of the
Government or any security approved by
Government.
(ii) Interest receivable from debentures or other
securities issued by or on behalf of a local
authority or a company.

4
Basis of Taxation on Interest on Securities

Theoretically, interest on securities will be taxable

in the period when it is earned, whether it has
been received or not.
But, in practice interest on securities will be taxed
in the year of actual receipt.

5
Basis of Taxation on Interest on Securities

As interest on securities is a separate head of

income, therefore, even if the securities are held
as trading assets within the course of any
business undertaken by a bank, an insurance
company or a stock broker, The interest must be
charged under the head “Income from interest on
securities” and not under “Income from business or
profession.
But when these securities are sold, any gain or
looses from such disposal will be considered as
capital gain or losses hense will be recorded
under the head “Capital Gain”.
6
Conditions of Taxation on Interest on Securities

According to Section 22, the following conditions

should be met in order to be termed as an income
under the head “Income from Interest on
Securities”:
(i) Income must be received as interest.
(ii) The income must be from govt. securities.
(iii) Other than the govt. securities, income must be
received from debentures or securities issued by local
authorities and companies.
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Conditions of Taxation on Interest on Securities

The following incomes will not be considered as

interest income from securities:

• Interest or profit received from all kind of bank

deposits like savings, fixed etc.
• Income from investments other than securities in any
govt. or commercial project.

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Conditions of Taxation on Interest on Securities

• Dividend from equity and preference shares of public

and private limited companies.
• Interest on capital and loan from a person or
partnership business.
• Interest on securities issued by any individual,
partnership firm, association of persons (AOP), club
etc.
• Gain on sale of securities.

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Conditions of Taxation on Interest on Securities

• Interest on saving certificates.

• Interest on Post Office Savings Bank and Postal
Saving Certificates.
• Interest receivable from securities issued by any
foreign government.
• Interest received from a company on a Book-Debt/
Accounts Receivable balance.

1
 Classification of Securities
According to section 22 of the ITO 1984, securities can be broadly
categorized into two categorizes: government and commercial.

Tax-exempt
Government
Securities

Taxable

Debenture
Commercial
Zero-Coupon Bond

Taxable Government Securities: Tradable & Non-Tradable (Savings

Instrument)
Debentures: Conventional (Interest Bearing) & Islamic (Profit
Bearing) 1
 Classification of Securities
(a) Government Securities: These are the securities issued
by the Bangladesh government. Such as short term- Treasury-
bill with original maturities of less than 1 year. Or Long term-
Government Bond with maturities of one year or more. T-
bond, Promissory note, National Bond etc. on the basis of tax
chargeability they can be classified in to two categories;
(i) Tax-exempt Government Securities: These are the
securities issued by the government with the condition that
interest thereon shall not be liable to tax.

(ii) Taxable Government Securities: These are the

government securities on which tax is deducted at source at
specified rate. (current TDS rate is 5% as per Section 51(1).

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 Bangladesh Govt. Securities Market
Government securities market of Bangladesh is consist of tradable
and non tradable securities.
Non-tradable securities include National Savings Certificates i.e.
‘Sanchayapatras’ and ‘Sanchayabonds’ which are only for retail
investors.
The tradable securities include Treasury Bills (T-Bills) of 91, 182
and 364 days maturities and
Bangladesh Government Treasury Bonds (BGTB) of 2, 5, 10, 15
and 20 years maturities.
T-Bills and BGTBs are issued through auctions. Only Primary
Dealers (PD) can submit bids in the auctions. Other institutions and
individuals can submit bids in auction but through the PDs. At
present 20 banks are performing as Primary Dealer.
T-Bills and BGTBs can be sold in the secondary market.
 Classification of Securities
(b) Commercial Securities: According to Section 22(b),
securities which are approved by the Securities and
Exchange Commission (SEC) and issued by or on behalf
of a local authority or a company will be considered as
commercial securities.
(i) Debentures: These are the commercial securities
approved by the BSEC and issued by or on behalf of a
local authority or a company 5% tax is deducted at source
from the interest on such commercial securities.
(ii) Zero-Coupon Bond: A zero-coupon bond is a bond
bought at a price lower than its face value, with the face
value repaid at the time of maturity.
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 Bond vs. Debentures
Debentures are, in many respects, similar to bonds. But the main difference
with bonds is that,
Debentures have a shorter maturity than bond, usually 1-10 years.
Also while bonds provides coupon as well as face value at the end,
debentures usually provide periodic payments covering both interest
and principal, and payment stops at maturity.
In addition, bond issuing firms usually have underlying assets as
collateral that serves as a guarantee to make payments, while debentures
usually do not have such assets as collateral.
Usually, debentures are issued by large, financially sound firms whose
ability to service the debt is not in question.
Usually the main purchasers of debentures are pension funds and
insurance companies.

In our country, a preference among firms has been seen to issue debenture
than bonds. For example, Beximco Textiles (now BEXTEX) issued 96000
debenture of Tk.2500 each, at 14% at 7th may 1995. the debentures had a
10-year maturity, thus ending at 1st July 2005. the payments were made
semiannually and included both interest and repayment of principal.
 Bond and Debentures in DSE
Bonds

Debentures

Source: https://www.dsebd.org/by_industrylisting1.php
 Distinction between Tax Exempted & Taxable Govt.
Securities

Points of Difference Tax-Exempted Gov. Taxable Gov. Sec.

Sec.
TDS Not Applicable Applicable @ 5% on
interest
Grossing Up Grossing up is not Grossing up is
required required
Exemption Fully exempted Fully Taxable
Allowable Not applicable Applicable to the
Deduction of extent of expenses
Expenses as per section 23.
 Grossing up of Interest

Interest income taxable under the head “Income from

interest on securities” must be the gross amount and not
the net amount. In the case of securities of the
government, or securities approved by the government,
debentures issued by any local authority or company 5%
tax is deducted at source from interest on such securities.

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 Grossing up of Interest

As 5% tax is deducted at source, interest received is net

amount and to be grossed up by using the following
formula:

Gross Interest = Net Interest × 100

100 – TDS Rate

Or
Gross Interest =
Net Interest X [ 100 / (100 - Rate of TDS) ]

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 Grossing up of Interest

Examples:
1. Mr. X has received Tk. 9,500 as interest on
taxable government securities/debentures.
Since the current rate of tax deducted at source is
5%, the amount of gross interest will be :
Tk. [9,500 X 100 / 95] = Tk. 10,000

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 Grossing up of Interest
Examples:
2. But if the value of taxable government
securities/debentures is given, it will be possible
to compute the gross interest directly.
Such as, the value of Mr. X’s 10% taxable
government security/debenture is Tk. 2,00,000.
So, the amount of gross interest will be [2,00,000
X 10%] = Tk. 20,000

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 Admissible Expenses

• Following deductions from respective interests are

allowable(section:23)
1. Bank Commission /Charges for collecting Interest:
• Bank commission or charges which have been deducted by
the bank for collecting interest.
• Bank commission charged for purchasing securities will be
capital expenditure, hence will not be considered as allowable
expense.
2. Interest on Borrowed Capital for Investment in Securities:
• Any Interest on money borrowed for the purpose of
investment in the securities by the assesse will be an
allowable expense.
 Example 1
• Calculate taxable income from the given data: Interest on tax-exempt
government securities Tk. 5,000; Interest on taxable government
securities Tk. 4,750; Interest upon debentures Tk. 24,700; and income
from zero coupon bond Tk. 5,000 received by an individual.
Particulars Tk. Tk.
Interest on Tax Exempt govt. securities Tk. 5,000
Less: Exempted (Full) Tk. 5,000
Interest o Taxable govt. securities (4,750 * Tk. 5,000
100/95)
Interest on Debentures (24,700 * 100/95) Tk.
26,000
Income from Zero coupon Bond Tk. 5,000
Exempted (Full) Tk. 5,000
Total 31,000
 Summary Income from Interest on Securities
Broad categories Sub Categories Basis of Chargeability
Tax Exempted Gov. Securities • No TDS.
Government • No Admissible Expense
Securities • Fully Exempted.
Taxable Gov. Securities • 5% TDS.
• Grossing up is required if net
interest amount is given.
• Admissible expenses are to be
deducted.
• Fully Taxable
Commercial Debentures • 5% TDS.
Securities • Grossing up is required if net
interest amount is given.
• Admissible expenses are to be
deducted.
• Fully Taxable
Zero Coupon Bonds • No TDS.
• No Admissible Expense
• Fully Exempted.
 Exercise-2
Compute the income chargeable under the head interest on
securities for Mr. Musa for the income year 2014-15;
10% tax exempted government securities valued Tk.50,000;
Interest received on taxable government securities Tk.4,750;
Tk. 18,050 as interest on debentures and income from zero coupon
bond Tk. 15,000.
The bank has charged Tk. 100 collecting interest on tax exempt
government securities, Tk. 75 for taxable government securities, and
Tk. 150 for zero coupon bond. The bank has deducted Tk. 380 as
commission for collecting interest on debentures. In addition,
debentures were purchased by taking a bank loan of Tk. 100,000 @
6% interest.
 Solution-Exercise-2
Mr. Musa
Assessment Year:2015-16, Income Year:2014-15
Computation of Total Income from Interest
Income from Interest on Securities Tk. Tk.
a) Interest on 10% tax exempt govt. Securities 5,000
(50,000*10%) 5,000 Nil
Less: Exempted -Full
b) Interest on taxable govt. securities 5,000
[(4750*100)/95] (75) 4,925
Less: Allowable expense (bank Charge)
c) Interest on debentures [(18050*100)/95] 19,000
Less: allowable expenses (bank Charge) (380)
Interest on Loan (100,000*6%) (6,000) 12,620
d) Income from zero coupon bond 15,000
Less: Exempted-Full 15,000 Nil
Total 17545
 Exercise 3
• From the given information compute income chargeable under
the head interest on securities for MR. Hamid for the income
year 2018-19
a) Interest on 10% tax exempted government securities Tk. 10,000
b) Interest on taxable govt. securities tk. 9,500
c) Investment on 12% debentures Tk. 120,000; and
d) Income from zero coupon bond Tk. 15,000
The bank has charged Tk. 200 collecting interest on tax exempted
government securities and tk. 100 for zero coupon bond. The bank
has also deducted 5% commission for collecting interest on taxable
government securities and debentures.
In addition, bank loans were taken to invest in: for tax exempted
govt. securities Tk. 100,000 @ 5% interest; for taxable government
securities Tk. 50,000 @ 6% interest and for debentures Tk.
120,000@ 6% interest.
 Solution: Exercise-3
Mr. Hamid
Assessment Year:2019-20, Income Year:2018-19
Computation of Total Income
Income from Interest on Securities Tk. Tk.
a) Interest on 10% tax exempt govt. Securities 10,000
Less: Exempted –Full 10,000 Nil
b) Interest on taxable govt. securities [(9,500*100)/95] 10,000
Less: Allowable expense [bank Charge(9500*5%)] (475)
Interest on Loan (50,000 *6%) (3,000) 6,525
c) Interest on debentures [(120,000*12%] 14,400
Less: allowable expenses (bank Charge)[(14400*95%)*5%] (684)
Interest on Loan (120,000*6%) (7,200) 6,516
d) Income from zero coupon bond 15,000
Less: Exempted-Full 15,000 Nil
Total 13041
 Example 4
• Determine the Tax payable income for Mr. saif from Interest on
securities for the Income year 2018-19. During the year Mr. saif
Invested in-
a) Tk. 60,000 in 8% tax-exempt govt. securities,
b) Tk. 50,000 in 10% taxable govt. securities,
c) Tk. 200,000 in 15% debentures (Purchased on 01.01.19)
• He financed Tk. 100,000 by taking 8% loan to purchase debentures.
• His bank has charged Tk. 2380 as collection fee of these interests.
• Moreover, during the income year he has received Tk. 20,000 after
expiry of the maturity period of 2 year zero coupon bond.
Acquisition price of these bonds were tk. 18,000. No bank charge
was applicable for collecting interest on zero coupon bond.
 Solution: Exercise-4
Mr. Saif
Assessment Year:2019-20, Income Year:2018-19
Computation of Total Income
Income from Interest on Securities Tk. Tk.
a) Interest from tax exempted government securities 4,800
(60,000*8%)
Less: Fully Exempted 4,800 Nil
b) Interest on taxable govt. securities (50000* 10%) 5,000
Less: Allowable expense [bank Charge(2380/23800)*4750] (475) 4,525
c) Interest on debentures [(200,000*15%*6/12] 15,000
Less: admissible expenses-bank Charge[(2,380/23,800)*14250] (1425)
Interest on Loan (100,000*8%*6/12) (4,000) 9,575
d) Income from zero coupon bond 2,000
Less: Exempted-Full 2,000 Nil
Total 14,100
 Solution: Exercise-4
Mr. Saif
Assessment Year:2019-20, Income Year:2018-19
NOTE
Note:1 -Total Interest Collected by Bank Tk.
a) Tax exempted government securities 4,800
b) Taxable government securities (5,000 – TDS @ 5%) 4,750
c) Debentures (200,000*15%*6/12) – TDS @ 5% 14,250
Total 23,800
 Exercise 5
• From the given information compute the income chargeable under
the head, income from interest on securities for MR. Tanvir for the
income year 2018-19
a) Interest on tax-exempt govt. securities, Tk. 10,000;
b) Value of 15% taxable govt. securities, Tk. 30,000;
c) Tk. 9,500 as interest on 12% debentures and
d) Interest on Zero coupon bond Tk. 10,000.

The bank has charged Tk. 3,082 as collection fee of these interests. In
addition to this he has taken a bank loan of Tk. 100,000 @ 6%
interest to purchase additional 10% approved commercial
debenture on January 01, 2018.
 Solution: Exercise-5
Mr. Tanvir
Assessment Year:2019-20, Income Year:2018-19
Computation of Total Income
Income from Interest on Securities Tk. Tk.
a) Interest from tax exempted government securities 10,000
Less: Fully Exempted
10,000 Nil
b) Interest on taxable govt. securities 4,500
Less: Allowable expense [bank Charge(3,082/38,525)*4275] (342) 4,158
c) Interest on 12% debentures [(9,500*100)/95] 10,000
Interest from 10% Debentures [(100,000*10%)*6/12] 5000
Less: admissible expenses-bank Charge[(3,082/38,525)*14250] (1,140)
Interest on Loan (100,000*6%*6/12) (3000) 10,860
d) Income from zero coupon bond 10,000
Less: Exempted-Full 10,000 Nil
Total 15,018
 Solution: Exercise-5
Mr. Tanvir
Assessment Year:2019-20, Income Year:2018-19
NOTE
Note:1 -Total Interest Collected by Bank Tk.
a) Tax exempted government securities 10,000
b) Taxable government securities (4,500 – TDS @ 5%) 4,275
c) 12 % Debentures 9,500
d) 10% Debenture [(100,000*10%)*6/12] – TDS @ 5% 4,750
e) Zero coupon Bond 10,000
Total 38,525
 Exercise 6
The information relates to Interest on Securities for Mr. Foysal for the
income year 2018-2019 are as follows:
(i) Interest on tax free government securities Tk. 23,000.
(ii) Value of 10% taxable Government securities Tk. 400,000.
(Purchased on January 01, 2019)
(iii) Tk. 19,000 as interest on 15% approved commercial debentures.
• The bank charged Tk. 2,000 for collecting above interests. He has
received Tk. 80,000 after the expiry of maturity period of 3-year
zero coupon bond and the acquisition price of this bond was Tk.
50,000.
• In addition to this he has taken a bank loan Tk. 200,000 at the rate
of 5% interest to purchase taxable govt. securities on January 01,
2019.
Required:
Compute taxable income under the head Income from Interest on
Securities for the income year ended June 30, 2019.
 Exercise 6: Solution
Income Year: 2018-2019
Assessment Year: 2019-2020
Particulars Amount Amount
(Tk.) (Tk.)
Interest on Tax Free Government Securities 23,000
Less: Exemption - Full Amount (23,000) 0
Interest on Taxable Government Securities 20,000
[(4,00,000 × 10%)*6/12]
Admissible Expenses:
Less: Bank Charge (2,000 ÷ 61,000 × 19,000) (623)
Interest on Bank Loan [(200,000×5%) ×6/12] (5000) 14,377
Interest on Approved Commercial debentures 20,000
(19,000 × 100 ÷ 95) (grossed up)
Less: Bank Charge (2,000 ÷ 61,000 × 19,000) (623) 19,377
Interest on Zero Coupon Bond 30,000
Less: Exemption - Full Amount (30,000) 0

Income from Interest on Securities 33,754

 Solution: Exercise-6
Mr. faysal
Assessment Year:2019-20, Income Year:2018-19
NOTE
Note:1 -Total Interest Collected by Bank Tk.
a) Tax exempted government securities 23,000
b) Taxable government securities (20,000 – TDS @ 5%) 19,000
c) 15% Debentures (20,000 – TDS @ 5%) 19,000
Total 61,000

N.B. Full Exemption is applicable on both Tax Free

Government Securities and Zero Coupon Bond. On the other
hand TDS is not applicable on Tax Free Government
Securities, but TDS is applicable on Zero Coupon Bond.