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Often we have seen People opening Fixed Deposits in the Name of wife especially if the wife is home-make. He thinks that this would be reduce his total income and he will not have to pay tax on that. His wife can, in turn, invest the money in a bank fixed deposit and earn tax-free income. Is this really a win-win for him?  This article tries to answer the following questions

  • Will husband’s tax liability be reduced by gifting the money to his wife?
  • Will the gifted amount be taxable in the hands of his wife?
  • Is the interest income received by investing the gift taxable and if yes, in whose hands?
  • If Interest of FD is more than stipulated amount, Rs 10,000 in a financial year, TDS  deducted  is associated with PAN of wife. How can husband claim the TDS?
  • How to show Interest,TDS in Income Tax Return?

Clubbing of Income in case of wife or spouse

Husband(Wife) can gift whatever he wants out of this post-tax income to his wife(husband).His wife will, however, not be taxed on the receipt of a gift from her husband, who falls under the specified list of  relatives who are exempt under the Income Tax Act. The taxman has set limits to this joining of the finances of the two spouses. He has no problems if one spouse gives money to the other. After all, it’s their money and spouses are in the list of specified relatives whom you can gift any sum without attracting a gift tax.

Overview of Fixed Deposit Income

The interest income from the bank FD is not  tax-free Fixed Deposit , Interest , TDS, Tax,Income Tax Return, Refund

Fixed Deposit(FD) is an investment product which allows you to invest a lump of money for a fixed time period and at a fixed rate of interest. Its features are as follows:From 1 June 2015 TDS will be levied if the combined interest income from FDs in all branches of a bank exceeds Rs 10,000 in a year.

  • Interest that is earned on fixed deposits is taxable in the hands of the depositor as per the income slab so a person who earns income between 2 lakh to 5 lakh pays only 10% tax on it while person who earns above 10 lakh pays 30% tax (And education cess and surcharge at the rate of 3%)
  • If the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year, you become liable for TDS .
  • If PAN is not submitted TDS is deducted at the rate of 20%.
  • TDS is also deducted on interest earned or accrued ,but not yet paid, at the end of the financial year. If you have gone for cumulative option in FD which pays interest at maturity still interest would be earned every year and TDS if applicable would be deducted though you DID NOT get the money.
  • A consolidated TDS Certificate in Form 16A, for TDS deducted during a financial year will be issued in the month of April of the following financial year.
  • TDS deducted  comes up in your Form 26AS which tied to your PAN number. Details in it should match the Form 16A provided by bank to you.
  • Tax liability is calculated on the first applicant’s name. The second or joint holder has no tax liability.

If TDS is deducted on Fixed Deposit then as TDS will appear in Form 26AS you MUST to show it in the same year as Income Tax Department will be using the TDS in verifying your income tax return. Our article Viewing Form 26AS on TRACES explains it in detail.

Fixed Deposit in Name of Wife

Interest on FD made out of husband’s money  will not be taxed as income in the hands of his wife but due to clubbing provision will be taxed as per husband’s tax slab. Now complications  arise when TDS is deducted in name of wife, husband cannot claim it in ITR and to claim TDS has to file ITR for wife asking for refund.

If interest on FD in a bank,all branches combined since June 1 2015, is more than  Rs 10,000  a year bank will deduct TDS in the name of first holder. If PAN ,of wife the first holder,is provided TDS would be at the rate of 10% else it is at the rate of 20%. Now this TDS  would appear against the PAN number of wife. So though because of clubbing provision interest of FD in name of wife is clubbed with that husband , as TDS is against PAN of wife husband cannot claim it while filing his ITR and so would have to pay as per his income tax slab.

TDS deducted cannot be claimed in ITR of Husband but can be claimed by filing ITR of wife with 0 income and asking for refund.

How to show Income from Interest in FD in name of wife in Husband’s ITR?

In Husband’s ITR interest on FD should be shown under Interest in Income from Other sources as his income due to clubbing provision. Income from Fixed Deposit needs to be shown as Interest portion of Income from other sources as explained in  Income From Other Sources :Saving Bank Account, Fixed Deposit,RD and ITR as shown in picture below. Please show the entire interest amount including TDS. For example if you have earned income of 19,535 (without TDS deduction) with TDS deducted  as Rs 1953.5 ( 10% of 19,535) then 19535 should be shown in income from other sources and 1953.5 should be claimed in TDS. In this example Interest from FD is Rs 6990 and that’s been shown in Interest Gross. If there are multiple Fixed Deposits you need to add all of them together.

Interest from FD as Interest part in Income from Other Sources of Schedule OS

Interest from FD as Interest part in Income from Other Sources of Schedule OS

Usually TDS (if deducted) on the interest income should be claimed by the individual, against whose PAN number TDS is deducted, in the income tax return and should be shown in TDS section. But in case of Fixed Deposit in name of wife, TDS is deducted against wife’s PAN number, husband cannot claim it.  So calculate your income using the total income. But is the TDS deducted lost? No one can claim it by filing ITR in name of wife and asking for refund.

ITR in name of wife for claiming TDS

Verify that Form 26As of your wife reflects the TDS deducted . Please contact the bank to update details if Some entry(s) is missing or If Status of Booking is U which means Unmatched . It means Deductors have not deposited taxes or have furnished incorrect particulars of tax payment. Final credit will be reflected only when payment details in bank match with details of deposit in TDS / TCS statement.

As TDS is deducted against PAN number of wife and wife has no income. To claim TDS file the ITR with income of wife from various sources  as 0(zero).  Process of how to show TDS from Form 16A in ITR from our article  Fill Excel ITR1 Form : Income, TDS, Advance Tax as shown in image below

  • Unique TDS Certificate Number : This is a six digit number which appears on the right hand top corner of those TDS certificates which have been generated by the deductor through the Tax Information Network (TIN) Central System.
  • Deducted Year -mention the financial year in this column.
  • Total Tax deducted Enter details from Form 16A. Round off to nearest Rupee.
  • Amount out of (6) claimed for this year.  Usually this will be the same as tax deducted. This value cannot exceed tax deducted. Round off to nearest Rupee.
Filling TDS on Income from Fixed Deposit as per Form 16A

Filling TDS on Income from Fixed Deposit as per Form 16A

How TDS, Clubbing of Wife’s income can be avoided

To avoid TDS deduction in name of wife for next year Form 15G  if wife is below 60 years can be submitted to bank. Our article Avoid TDS : Form 15G or Form 15H explains the forms in detail.

  • Roundabout Way: One may think of making roundabout gifts for example gifting money to his mother-in-law, a transaction that has no gift tax implications. Then a few days later, the mother-in-law gifts the money to her daughter, which again does not have any tax implications. The money can then be invested without attracting clubbing provisions, right? Wrong. Given that most big-ticket transactions are now reported to the tax department by third parties (banks, brokerages, mutual funds, insurance companies), it may not be difficult to put two and two together. If the taxman discovers this circuitous transaction, you may be hauled up for tax evasion. Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.
  • It has been suggested that to avoid Clubbing of income husband can show it as loan to wife , charge interest at fair rate or she can give you her jewellery. Tax man can ask you for explanation just like they did Shah Rukh Khan.  In FY 2005-06 Gauri funded her purchases of a residential house in Delhi of Rs 1.66 crore and jewellery of Rs 70 lakh, largely out of the interest-free loan of Rs 2.30 crore received from Shah Rukh. The ITAT dismissed the plea of the tax authorities that Shah Rukh had resorted to the loan arrangement simply to bring the taxable income in the lower tax bracket. Ref : SRK’s loan to wife not sham deal to avoid tax, says ITAT
  • One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund (although the 8% interest rate offered and the 15-year lock-in does not compare with fixed deposits). There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.
  • Income earned from the income earned is not clubbed Let’s say you invest Rs. 10 Lakhs in your wife’s name, and the interest earned on it is Rs. 1,00,000, this would be added to your income for the computation of income tax. However, when your wife invests this Rs. 1,00,000 in another FD and earns Rs.20,000 as interest on it, this is considered to be her own income, and is not clubbed with your income. This is called as “compounded income” deal with it in detail.

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Therefore, husband must understand that he may not be able to use a financial gift effectively to save tax. Neither the amount he gifts nor the income earned on that will be exempt from tax.

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