Set off Interest paid on G-sec
This query is : Resolved
14 September 2009
Dear, Can anyone guide me regarding Interest received on G-Sec Bonds. I have purchase G-Sec bonds & have paid Interest on purchases for that bonds. Can I set off the interest received on G-Sec Bonds against interest paid on G-Sec bonds.
14 September 2009
Yes
25 July 2025
Great question — this touches upon a subtle but important aspect of taxation of **Government Securities (G-Secs)** under the **Income Tax Act, 1961**, specifically about **interest paid on accrued G-Secs** and **its set-off against interest income**.
---
## ✅ **Your Situation:**
* You **purchased G-Sec bonds** in the secondary market.
* While purchasing, you **paid “accrued interest”** to the seller.
* Later, you **received full interest** from the government on the interest due date.
* You want to know:
> *Can you deduct (or set off) the interest paid at the time of purchase from the interest income received later?*
---
## ✅ **Short Answer:**
> ✔️ **Yes**, the **interest paid on purchase** of G-Secs is **allowed as a deduction** against the **interest income received**, provided proper treatment is followed.
---
## ⚖️ **Legal & Tax Treatment:**
### 🔹 **1. Taxation of G-Sec Interest:**
* **Interest received** on G-Sec is taxable under:
* **“Income from Other Sources”**, or
* **“Business Income”**, if trading in securities.
### 🔹 **2. Interest Paid on Accrued Basis:**
When G-Sec is bought **between two interest payment dates**, the buyer pays the **accrued interest** to the seller.
This accrued interest:
* Is **not capital** in nature.
* Is **allowed as a deduction** when computing net taxable income from the bond.
---
## 🔹 **CBDT Circular Support:**
### 📘 **CBDT Circular No. 2/2002, dated 15-2-2002**
> *"Interest paid for the broken period on purchase of securities is allowable as a deduction against interest received, provided it is shown separately and not capitalized."*
So, you **can claim deduction** of interest paid, provided:
* You **do not add it to the cost of the bond** (i.e., don't capitalize it).
* You **separately disclose** it in your return as a deduction from interest income.
---
## ✅ **Illustrative Example:**
| Particulars | Amount |
| ----------------------------------- | ------ |
| Interest paid on purchase (Feb) | ₹2,000 |
| Interest received from G-Sec (June) | ₹5,000 |
| **Taxable Interest Income** | ₹3,000 |
---
## 🧾 **Reporting in Income Tax Return (ITR):**
* If under **“Income from Other Sources”**:
* Report gross interest of ₹5,000.
* Claim deduction of ₹2,000 under “Other deductions” or “Expenses”.
* If under **“Business Income”**:
* Show as business expense in P\&L under “Interest on securities – net”.
---
## 🚫 **Caution:**
* **Do not add accrued interest to cost of acquisition** if claiming it as deduction — this would result in **double deduction**, which is disallowed.
* Maintain **supporting documents** — broker note, contract showing interest paid, etc.
---
## ✅ Final Summary:
| Issue | Treatment |
| -------------------------------------------------- | ------------------------------------------------------ |
| Interest paid on G-Sec purchase (secondary market) | ✅ Allowed as deduction against interest income |
| Circular support | CBDT Circular 2/2002 |
| Condition | Must not capitalize; must claim separately |
| ITR Disclosure | Under "Income from Other Sources" or "Business Income" |
---
Let me know if you want a **sample ITR entry**, **journal entry**, or Excel working for this.
---
## ✅ **Your Situation:**
* You **purchased G-Sec bonds** in the secondary market.
* While purchasing, you **paid “accrued interest”** to the seller.
* Later, you **received full interest** from the government on the interest due date.
* You want to know:
> *Can you deduct (or set off) the interest paid at the time of purchase from the interest income received later?*
---
## ✅ **Short Answer:**
> ✔️ **Yes**, the **interest paid on purchase** of G-Secs is **allowed as a deduction** against the **interest income received**, provided proper treatment is followed.
---
## ⚖️ **Legal & Tax Treatment:**
### 🔹 **1. Taxation of G-Sec Interest:**
* **Interest received** on G-Sec is taxable under:
* **“Income from Other Sources”**, or
* **“Business Income”**, if trading in securities.
### 🔹 **2. Interest Paid on Accrued Basis:**
When G-Sec is bought **between two interest payment dates**, the buyer pays the **accrued interest** to the seller.
This accrued interest:
* Is **not capital** in nature.
* Is **allowed as a deduction** when computing net taxable income from the bond.
---
## 🔹 **CBDT Circular Support:**
### 📘 **CBDT Circular No. 2/2002, dated 15-2-2002**
> *"Interest paid for the broken period on purchase of securities is allowable as a deduction against interest received, provided it is shown separately and not capitalized."*
So, you **can claim deduction** of interest paid, provided:
* You **do not add it to the cost of the bond** (i.e., don't capitalize it).
* You **separately disclose** it in your return as a deduction from interest income.
---
## ✅ **Illustrative Example:**
| Particulars | Amount |
| ----------------------------------- | ------ |
| Interest paid on purchase (Feb) | ₹2,000 |
| Interest received from G-Sec (June) | ₹5,000 |
| **Taxable Interest Income** | ₹3,000 |
---
## 🧾 **Reporting in Income Tax Return (ITR):**
* If under **“Income from Other Sources”**:
* Report gross interest of ₹5,000.
* Claim deduction of ₹2,000 under “Other deductions” or “Expenses”.
* If under **“Business Income”**:
* Show as business expense in P\&L under “Interest on securities – net”.
---
## 🚫 **Caution:**
* **Do not add accrued interest to cost of acquisition** if claiming it as deduction — this would result in **double deduction**, which is disallowed.
* Maintain **supporting documents** — broker note, contract showing interest paid, etc.
---
## ✅ Final Summary:
| Issue | Treatment |
| -------------------------------------------------- | ------------------------------------------------------ |
| Interest paid on G-Sec purchase (secondary market) | ✅ Allowed as deduction against interest income |
| Circular support | CBDT Circular 2/2002 |
| Condition | Must not capitalize; must claim separately |
| ITR Disclosure | Under "Income from Other Sources" or "Business Income" |
---
Let me know if you want a **sample ITR entry**, **journal entry**, or Excel working for this.
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