Government Securities Auction Sept 2026: Tax Impact for Primary Dealers

What Happened?

On September 3, 2026, the Government of India announced an underwriting auction for the sale of Government Securities worth ₹32,000 crore. This auction will be conducted on Friday, September 4, 2026, through a multiple price-based method. Two securities are being issued: New GS 2031 (₹21,000 crore) and 7.71% GS 2066 (₹11,000 crore). Primary Dealers (PDs) are required to participate with specific Minimum Underwriting Commitment (MUC) amounts, and underwriting commissions will be credited to their RBI current accounts on the date of security issuance.

Background & Legal Context

What is Underwriting in Government Securities?

Underwriting commitment is a guarantee given by Primary Dealers to the Government that they will purchase securities up to a specified amount if public bids fall short. This is part of the debt management strategy notified on November 14, 2007, by the Reserve Bank of India on behalf of the Government. The scheme defines Minimum Underwriting Commitment (MUC) obligations for each PD.

Income Tax Treatment Under Income Tax Act 2025

From an Income Tax Act 2025 perspective, underwriting commissions earned by Primary Dealers fall within the definition of "income from business or profession" under Section 28 of the Income Tax Act 2025. For Assessment Year 2026-27 (relevant for FY 2025-26 income), this income must be reported by the PD.

• Nature of Income: Underwriting commission is treated as income earned in the course of business carried on by the PD. It is not passive income but active income derived from services rendered (underwriting guarantee).
• Computation: Under Section 30 to Section 37 of the Income Tax Act 2025, PDs can claim deductions for business expenses incurred in earning this commission. However, the underwriting commission itself is gross income before such deductions.
• Timing of Recognition: As per Section 145(1) of the Income Tax Act 2025, income must be recognized when the right to receive it accrues. For underwriting commissions, this occurs when the securities are issued, as stated in the notification—"on the day of issue of securities." Therefore, the commission becomes taxable in the financial year in which the securities are issued (September 2026 will fall in FY 2026-27, assessment year 2027-28).
• TDS Implications: Section 194LA of the Income Tax Act 2025 may apply if the Government deducts tax at source while crediting the commission. However, given that commissions are credited directly to PD accounts by RBI, normal TDS provisions under Section 194-O (for commission on underwriting) may not apply if the payment is made by a government entity.

GST Angle (Minimal for Government Transactions)

Interestingly, underwriting commissions paid by Government of India are exempt from GST as they relate to government securities issued by a sovereign entity. Section 6(4)(iii) of the GST regime exempts transactions involving government securities. Therefore, no GST is applicable on underwriting commissions, and Primary Dealers do not need to charge or account for GST on these earnings.

What Does This Mean for You?

For Primary Dealers:

Primary Dealers participating in this ₹32,000 crore auction must ensure accurate tax accounting for the underwriting commissions they will earn. Here's the practical impact:

• Income Recognition: The commission earned from underwriting will be taxable income in AY 2027-28 (since the audit happens in September 2026, which falls in FY 2026-27). PDs must include this in their income tax returns filed by July 31, 2027, for AY 2027-28.
• Deduction Planning: PDs can claim deductions for direct and indirect expenses incurred in maintaining their underwriting business. This includes salaries, office rent, technology costs, compliance costs, and regulatory fees. Proper documentation is critical under Section 31 of the Income Tax Act 2025.
• Book Audit Requirements: If PDs have total turnover exceeding ₹1 crore (which most will), they must get their books audited under Section 44AB of the Income Tax Act 2025. Underwriting commissions will form part of gross revenue for determining audit threshold.
• Transfer Pricing (if applicable): If a PD is part of a multinational group, Section 92 of the Income Tax Act 2025 may require transfer pricing documentation for any related-party transactions. However, for domestic underwriting, this typically does not apply.
• MIS and Documentation: PDs should maintain robust management information systems (MIS) to track underwriting commitments, bids placed, commissions earned, and supporting reconciliation with RBI records. Income tax authorities may scrutinize these if the PD undergoes an audit or assessment.

For Investors in Government Securities:

Investors buying these securities from the auction should note that interest earned on 7.71% GS 2066 and New GS 2031 is fully taxable under Section 5 of the Income Tax Act 2025 (income from other sources). No tax exemption is available for interest on Government securities. However, capital gains on sale of these securities before maturity may qualify for indexation benefits if held for more than 12 months, under Section 48 of the Income Tax Act 2025.

What Should You Do Now?

• If You Are a Primary Dealer: Notify your tax and compliance team immediately about participation in this auction. Ensure that your accounting systems are configured to track the commission receipt, tax deduction (if any), and proper allocation to the FY 2026-27 and AY 2027-28. Review your transfer pricing position if you have related-party transactions.
• Verify TDS Compliance: Check with your RBI relationship manager whether TDS will be deducted at source or if the commission is credited gross. If TDS is deducted, ensure the TDS certificate (Form 16A equivalent) is obtained for filing with your tax return.
• Update Your Compliance Calendar: Mark September 4, 2026, auction date and the subsequent commission credit date. Set reminders for maintaining supporting documentation and for including this income in your FY 2026-27 books of accounts.
• Reconciliation Process: Establish a clear reconciliation process between RBI's credit advice, your bank statement, and your accounting records. Any discrepancies should be flagged and resolved before tax return filing.
• Professional Review: Engage your chartered accountant or tax advisor to review the accounting treatment and ensure alignment with Income Tax Act 2025 provisions and GST regulations (if applicable to your broader business).

Key Takeaways

• Taxable Income: Underwriting commissions earned by Primary Dealers are taxable income under Section 28 (business income) of the Income Tax Act 2025, recognised in FY 2026-27 (AY 2027-28) when credited by RBI.
• Deduction Benefits: Business expenses incurred in earning underwriting commissions are deductible under Section 30-37 of the Income Tax Act 2025. Maintain detailed records of all expenses.
• No GST Applicable: Underwriting commissions on Government Securities are exempt from GST as they relate to sovereign debt issuance.
• Audit Requirement: PDs with commissions contributing to aggregate turnover exceeding ₹1 crore must undergo statutory audit under Section 44AB of the Income Tax Act 2025 for AY 2027-28.
• Documentation is Key: Proper reconciliation, bank statement matching, and supporting documentation are essential for tax compliance and to defend your position if the income tax department questions the income recognition or quantum of expense deductions.

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