NISM XB Short Notes – Part 8: Income from Other Sources & Taxation of Debt Products (Chapters 9 & 10)

NISM Series X-B Investment Adviser Level 2 | Taxation Short Notes | PassNISM.in

Part 8 of the NISM XB short notes covers two related chapters: Chapter 9 (Income from Other Sources) and Chapter 10 (Taxation of Debt Products). These are important for investment advisers who guide clients on fixed-income investments.

Chapter 9: Income from Other Sources

This is a residual head of income — any income that is not exempt and cannot be classified under the other four heads (Salary, House Property, PGBP, Capital Gains) is taxed under "Income from Other Sources."

Income Always Taxed Under This Head

Certain incomes are always classified here regardless of their nature:

Dividend income
Winnings from lotteries, crossword puzzles, races, games, card games, or other gambling
Employees' contribution to staff welfare schemes (if not deposited within due date)
Interest on securities (where not taxed as PGBP)
Rental income from machinery, plant, or furniture
Composite rental income from letting out plant, machinery, furniture, and building together
Amount received under a Keyman insurance policy
Deemed income of a closely held company
Interest on compensation or enhanced compensation received in court awards
Advance money forfeited during failed property negotiations
Compensation on termination of employment
Any other income not taxable under any other head

Featured Snippet Answer: Income from Other Sources is the residual head under Indian income tax that includes dividends, lottery winnings, interest on securities, Keyman insurance payouts, and any other income not covered under the four main heads. Gift of Securities — Key Tax Rule

When any person receives a movable property (including shares and securities) from another person without paying for it (or at less than market value), the excess of market value over the amount paid is taxable as income from other sources in the recipient's hands.

However, no tax is charged if the aggregate shortfall across all such properties received during the year does not exceed Rs 50,000.

Exceptions (gifts received from the following are not taxable):

A relative (as defined in the Act: spouse, siblings, parents, children, etc.)
On the occasion of marriage
Under a Will or inheritance
From a local authority, trust, or educational institution

Chapter 10: Taxation of Debt Products

Debt instruments are used by governments, companies, and financial institutions to raise funds. Investors in debt instruments are essentially lenders — they earn interest and may earn capital gains on sale before maturity.

Sources of Income from Debt Instruments

Interest income – Regular coupon payments on bonds; taxed as income from other sources.
Capital gains – Arising from the sale or redemption of the debt instrument before or at maturity.

Types of Debt Products — Summary for NISM XB Coupon Bonds

These are standard bonds that pay periodic interest (coupon) to investors. The principal features are maturity (tenure), coupon (interest rate), and principal (face value).

Zero Coupon Bonds (ZCBs) and Deep Discount Bonds (DDBs)

ZCBs (also called Zero Interest Debentures) pay no periodic interest. They are issued at a discount to face value and redeemed at face value. The difference (face value minus issue price) is in the nature of a capital gain.
DDBs are a form of ZCB issued at a steep discount. In India, DDBs have been issued by public financial institutions like SIDBI, IDBI, and ICICI.

Convertible Bonds

These bonds allow the bondholder to convert the bond into equity shares of the issuing company on pre-specified terms. Two key terms at the time of issue:

Conversion ratio – Number of equity shares issued per bond converted.
Conversion price – The resulting effective price of equity when the conversion ratio is applied.

Partially or fully convertible bonds exist. Fully convertible bonds convert entirely to equity on the conversion date.

Commercial Papers (CPs)

Short-term, unsecured money market instruments issued in the form of promissory notes.
Introduced in India in 1990.
Issuable only by highly rated corporate borrowers to diversify short-term funding sources.

Government Securities (G-Secs)

G-Secs are tradable instruments issued by the Central or State Governments acknowledging a debt obligation:

Short-term (maturity < 1 year): Treasury Bills (T-Bills) and Cash Management Bills (CMBs)
Long-term (maturity ≥ 1 year): Dated Government Securities (Government Bonds)
State Government issues: State Development Loans (SDLs)

Central Government issues both T-Bills and bonds; State Governments issue only SDLs.

Masala Bonds (Rupee Denominated Bonds)

Indian Rupee-denominated bonds issued to overseas investors.
First issued by the International Finance Corporation (IFC) in London.
The key benefit: the currency risk is borne by the foreign investor, not the Indian issuer. If the rupee depreciates, the foreign investor receives less in their home currency — but the Indian company repays only the rupee amount.
Named "Masala" by IFC to reflect India's culture and spice.

Foreign Currency Convertible Bonds (FCCBs)

Quasi-debt instruments issued by Indian corporates to overseas investors in a freely convertible foreign currency.
FCCBs are equity-linked debt — they can be converted into equity shares or depositary receipts at a pre-determined price/rate.
If not converted, the investor holds the bond to maturity.
Due to the conversion option, FCCBs offer a lower coupon rate than comparable non-convertible debt.

Pass-Through Certificates (Securitised Debt)

Pass-Through Certificates (PTCs) are debt securities created from a pool of assets (loans or receivables) — a process called securitisation. Key parties:

Originator: The entity with the asset pool (e.g., a bank with housing loans).
Special Purpose Vehicle (SPV): A distinct entity set up to hold the asset pool and issue PTCs.
Investor: Buys the PTCs and receives periodic cash flows from the underlying asset pool.

Security Receipts (Asset Reconstruction)

Asset Reconstruction Companies (ARCs) purchase Non-Performing Assets (NPAs) from banks and issue Security Receipts (SRs) to Qualified Buyers. ARCs help banks clean up their balance sheets and focus on core banking activities.

Taxation of Non-Residents on Debt Income

Non-residents may face double taxation (in India and in their home country).
India has entered into Double Taxation Avoidance Agreements (DTAAs) with many countries to prevent this.
A non-resident eligible for DTAA benefits is taxed at the rate specified in the DTAA or the Income Tax Act, whichever is more beneficial.

Quick Revision Checklist — Income from Other Sources & Debt Taxation (NISM XB)

☑ Other sources = residual head; includes dividends, lottery, interest on securities, Keyman payouts
☑ Gift of securities from non-relative: taxable if aggregate shortfall > Rs 50,000
☑ ZCB: no coupon; discount = capital gain at redemption
☑ CP: short-term, unsecured, promissory note, highly rated corporates only
☑ G-Sec types: CMBs, T-Bills (short), Dated Securities, SDLs (long)
☑ Masala Bond: currency risk on investor, not on Indian issuer
☑ FCCB: foreign currency + convertible into equity; lower coupon
☑ DTAA: NRI taxed at more beneficial of DTAA rate or IT Act rate

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Original educational content for NISM XB exam preparation at PassNISM.in. Refer to official NISM workbook for complete authoritative content.