TDS on Interest on Securities: Rules, Rates and Reporting

Individuals who buy bonds, debentures or any type of government issued security have probably experienced a time when they have calculated their expected interest payments, felt assured their calculations were correct, only to find that when they received their payment (or interest deposited into their bank account), the amount was less than expected. This small discrepancy can be attributed to the TDS application to the interest earned on securities as applied to the individual. Many individuals do not become aware of or understand this difference until it becomes due at tax time.

In everyday use, interest on securities TDS simply means tax is deducted by the payer before the interest is paid to you. This applies to interest earned on government securities, corporate bonds and debentures. There’s a common assumption that interest from government securities is fully exempt, but that’s not entirely accurate. Once the interest crosses the prescribed limit, TDS deduction on government securities becomes applicable and the deduction is mandatory, regardless of your overall income level.

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The TDS rate on interest on securities is generally 10% for resident taxpayers, provided PAN details are correctly furnished. If PAN is not shared, the deduction can be much higher, which many investors realise only after seeing the reduced credit. It’s also important to understand how TDS on debentures interest works. Interest on listed debentures paid through recognised stock exchanges may not attract TDS in certain situations, as Securities Transaction Tax (STT) is already applied, while unlisted debentures usually do once the annual interest exceeds the threshold. In practice, this distinction can noticeably affect cash flow for long-term bond investors.

One area where mistakes commonly happen is compliance. TDS reporting for interest income requires you to report the full interest earned in your income tax return, not just the amount received after deduction. The deducted tax reflects in Form 26AS and the Annual Information Statement. If the figures you report don’t match these records, even by a small margin, it can lead to delays in processing refunds or additional follow-up from the tax department.

If TDS on interest is impacting your post-tax returns, it may be time to balance your portfolio with tax-efficient options. Explore ELSS Mutual Funds on 5paisa to save tax under Section 80C while aiming for long-term wealth creation through equity investments.