Chapter 7

INCOME FROM INTEREST ON

SECURITIES
Income from interest on securities
Interest: Means the price that someone pays for the temporary use of someone else’s fund.

Securities: Security is a document held by a creditor as guarantee of his right to receive

payment. Securities are financial instrument 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.
Classification of Securities:
Securities

Government Commercial

Zero Coupon
Tax-exempt Taxable Debentures
Bond
 Classification of Securities…….
(CONT’D)
1) Government security: A government security is an instrument issued by the government. Such a
security can be short term or long term. On the basis of tax charge ability, they can be classified into
two categories:

a) Tax Exempt government securities: These are the securities issued by the government with the
condition that interest there on shall not be liable to tax

b)Taxable Government Securities: These are government securities on which tax is deducted at
source at specified rate. So the Assessee receive net amount of interest and it is grossed up before
including in income. 5% TDS is applicable.
Classification of Securities…….
(CONT’D)
2) Commercial Securities: Securities which are approved by the SEC and issued on behalf of a
local authority/company will be considered as commercial securities.

A) Debenture: These are commercial securities approved by the BSEC and issued on behalf of a
local authority/company. 5% tax is deducted at source from the interest on debentures.

B) Zero Coupon Bond: It is a bond bought at a price lower than its face value with the face
value repaid at the time of maturity. It does not make periodic interest payments, hence the term
‘Zero Coupon Bond’. Any income derived from approved zero coupon bond received by a
person other than insurance company, financial institutions is fully exempted. Any income
derived from approved zero coupon bond received by bank, insurance company, financial
institutions 5% TDS is applicable.
Grossing up of Interest
Gross interest= Net interest * { 100/ (100-rate of TDS)}

Example 1: Mr. X has received tk 9,500 as interest on taxable government securities. Calculate
gross interest.
Solution: 9500*{100/(100-5%)}
= Tk 10,000
Example 2: If the value of Mr. X’s 10% taxable government security is tk 2,00,000. What will be
the gross amount of gross interest.
Solution: 2,00,000*10%
=Tk 20,000
ILLUSTRATION 7-2
From the given information compute the income chargeable under the head interest on securities
for Mr. Musa for the income year 2015-2016: 10% tax- exempt govt securities valued tk. 50000;
interest received on taxable govt securities 4750; Tk. 18,050 as interest on debentures and
income from zero coupon bond –Tk. 15000 . The Bank has charged tk. 100 collecting interest on
tax-exempt govt securities , tk 75 for taxable govt 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. 100000@6% interest
Solution of illustration 7-2
Assessee: Mr. Musa
Income year: 2015-2016
Assessment year: 2016-2017
Particulars Amount Amount

Income from interest on securities:

1) Interest on tax exempt government securities(5,000*10%) 5000
less: Exempted(FULL) (5000)
---
2) Interest on taxable government securities(4750*100/95) 5000
less: Allowable expenses
Bank Charge (75)
4925
3) Interest on Debenture ( 1850*100/95) 19000
less: Allowable expenses
Bank Charge (380)
Interest on loan (1,00,000*6%) (6000)
12620
4) Income from zero coupon bond 15000
less: Exempted( Full) (15000)
( assumed received from individual) ---
Taxable Income 17595
ILLUSTRATION 7-3
From the given information compute income chargeable under the head Interest on securities
for Mr . Hamid for the income year 2015-2016
1. Interest on 10% tax-exempt govt securities tk. 10000
2. Interest on taxable govt securities tk 9500
3. Investment on 12% debentures Tk 120000
4. Income from zero coupon bond tk 15000

The bank has charged tk 200 collecting interest on tax-exempt govt securities and tk 100 for
zero cupon bond. The bank has also deducted 5% commission for collecting interest on
taxable govt securities and debentures . In addition bank loans were taken to invest in, for
tax-exempt govt securities tk 100000@5% interest , for taxable govt securities tk 50000@6%
interest for debentures tk 120000 @6% interest .
 Solution of illustration 7-3
•  Assessee: Mr. Hamid
Income year: 2015-2016
Assessment year: 2016-2017
Particulars Amount Amount
Income from interest on securities:
1) Interest on tax exempt government securities 10,000
less: Exempted(FULL) (10,000)
---
2) Interest on taxable government securities(9500*100/95) 10,000
less: Allowable expenses
Bank Charge(9500*5%) (475)
Workings: Interest Loan(50,000*6%) (3000)
6525
100% ----14,400
3) Interest on Debenture ( 1,20,000*12%) 14,400
less: Allowable expenses
1 -------- Bank Charge(13680*5%) (684)
Interest on loan (1,20,000*6%) (7200)
6516
4) Income from zero coupon bond 15000
95------ less: Exempted( Full) (15000)
----
= 13680
Total Taxable 13,041
ILLSUTRATION 7-4
Compute taxable income for Mr. Tomal for the income year 2014-2015
considering given data :

Date of Nature of Purchase Interest rate Admissible Expense

purchase Security Price (Tk)
01.01.2014 Tax-exempt 100000 10% Bank Charge tk 500 for
collecting interest
01.01.2015 Government 50000 12%  
   
01.07.2014 Taxable 200000 20% Bank charge 5% of
govern collected interest
01.09.2013 Debenture 100000 15% Bank Charge tk 300 for
30.06.2015 50000 10% collecting interest
01.07.2014 1 year zero 90000 0% Maturity value tk.
coupon Bond 100000 and tk 200 was
deducted by bank as
commission for
purchasing the bond
Solution of illustration 7-4
Assessee: Mr. Tomal
Income year: 2014-2015
Assessment year: 2015-2016

Particulars Amount Amount

Income from tax-exempt government securities:

1) Interest on tax-exempt govt. securities(1,00,000*10%) 10,000
Interest on tax-exempt govt. securities(50,000*12%*6/12) 3,000
13000
Less: Exempted(FULL) (13000)
---
2) Interest on taxable govt. securities (2,00,000*20%) 40,000
less: Bank charge( (1900)
38100
3) Interest on debenture( 1,00,000*15%) 15000
less: Bank charge (300)
14700
4) Income from zero coupon Bond(1,00,000-90,000) 10000
less: Exempted(full) (10000)
---
Total Taxable 52,800
Total Taxable 52,800