Set off Interest paid on G-sec

This query is : Resolved

Rakesh (Querist)
Follow

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.

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

14 September 2009 Yes

Rakesh

Rakesh (Querist)
Follow

14 September 2009 Thanks..

Can anyone give more details on this

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

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.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now