Interest on Securities

Interest on securities refers to the periodic cash payment received by the holder of a debt instrument such as a bond, debenture or a fixed‑rate note. The payment is usually a fixed percentage of the face (par) value and is called a coupon.

For the NISM exam, this income is classified under "Income from Other Sources" in the assessee's tax return. It is distinct from dividend income because the payer is a borrower, not an equity issuer.

Exam questions often test your ability to compute the amount of interest for a given period, to derive the current yield, and to recognise the tax deduction at source (TDS) rules applicable to Indian residents.

Only debt‑type instruments earn interest. The most common ones in the Indian market are government securities, corporate bonds, non‑convertible debentures (NCDs) and certain fixed‑income mutual fund units that hold such securities.

Each instrument has a specific issuer, maturity profile and coupon frequency (annual, semi‑annual or quarterly). Understanding these nuances helps you pick the right formula and avoid mis‑calculations.

In the exam, you may be asked to match a security type with its typical interest‑payment feature or to compute the cash interest for a half‑year holding period.

• Government securities – issued by the RBI or central government, usually with a fixed coupon.
• Corporate bonds – issued by companies, may have higher coupons reflecting credit risk.
• Non‑convertible debentures (NCDs) – unsecured corporate debt, often listed on stock exchanges.

The coupon amount is calculated on the face (par) value of the security, not on the market price paid. For a fixed‑rate bond, the annual coupon = Face Value × Coupon Rate ÷ 100.

If the investor holds the bond for less than a year, interest is prorated on a day‑count basis (usually Actual/365). This prorated amount is what appears as cash interest in the investor's statement.

Remember: the formula uses the coupon rate expressed as a percent, and the time factor must be consistent with the day‑count convention. The exam frequently provides days held, so you must convert correctly.

Current yield is a simple way to express the annual return from interest relative to the market price paid for the security. It is useful for comparing bonds with different purchase prices.

The formula divides the annual coupon payment by the current market price and multiplies by 100 to express a percentage. Unlike yield‑to‑maturity, it ignores capital gains or losses at maturity, which is why the exam may ask you to identify its limitation.

Typical exam stems provide the coupon amount and market price, and you must compute the current yield quickly.

Interest earned on securities is taxable as "Income from Other Sources" under the Income Tax Act. For resident individuals, the rate is the applicable slab rate. Non‑resident Indians (NRIs) are taxed at 30% plus surcharge and cess unless a DTAA provides relief.

Section 193 of the Act mandates Tax Deducted at Source (TDS) on interest payments when the amount exceeds ₹10,000 in a financial year. The payer (e.g., the bond issuer or bank) deducts 10% TDS, which the investor can claim as a credit while filing returns.

Exam questions may present a scenario with TDS already deducted and ask for the gross interest or the net taxable amount. Remember to add back the TDS to obtain the gross interest before applying the slab rate.

Interest on securities contributes to the portfolio's total return alongside capital appreciation and dividend yield. Because interest is usually received periodically, it can be reinvested to enhance compounding effects.

When constructing a client’s advisory portfolio, advisers often allocate a portion to fixed‑income securities to provide a steady cash flow, especially for retirees. The proportion of interest income is reflected in the portfolio's weighted average return.

Exam scenarios may ask you to compute the portfolio’s overall return given the weightage of a bond that pays a known coupon. Treat the interest component as a separate return stream and combine it using the holding‑period return formula.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 require issuers of listed debt securities to disclose the coupon rate, payment dates and any call/put features in the prospectus. Advisers must verify that the client’s holding complies with these disclosures.

Advisers also need to ensure that the client’s KYC records capture the nature of interest‑bearing assets, as this impacts the suitability assessment under the Investment Adviser Regulations, 2016.

In the exam, you may be asked which regulation governs the disclosure of coupon details for a listed bond. The correct answer is the SEBI (ICDR) Regulations, 2018.