Tax on FD in Joint Accounts: Who Pays How Much?

#AD

Joint Fixed Deposits are a popular investment avenue in India for couples, parents and children and business partners. It is because these fixed deposits offer shared ownership and smoother access in case of emergencies. One question that all joint fixed deposit account holders should ask is: who will be paying tax on the interest earned from a joint FD. Is it the first holder, second holder or both the parties?

Well, it is not as simple as a split tax system. If you don’t understand the nitty gritty of who pays tax on joint fixed deposit interest then you might end up filing wrong tax declarations, face a penalty or be given an IT notice. Here’s a detailed guide for you to understand who should pay tax on joint FD accounts.

What is a Joint Fixed Deposit?

Before diving into the tax part of it, you should know what is a joint FD. It is a fixed deposit opened by two or more individuals. The options in a joint FD operations are generally as follows:

• Either or Survivor, i.e., either holder can operate or withdraw.
• Jointly, i.e., both joint FD account holders must sign for any transaction.
• Former or Survivor, the case where the first holder has full rights during their lifetime. The second holder gets access after their death.

Coming to the taxation, it depends on the ownership of funds and the source of investment.

How is Interest from a Joint FD Taxed?

As mentioned above, the person who contributes the funds is the beneficial owner of the fixed deposit, thus, they are liable to pay tax on the interest earned.

Here are 3 scenarios for you to understand tax liability in joint fixed deposit interest.

Scenario 1: Husband and wife joint FD where funds come from the husband

• FD amount: ₹10 lakh
• Opened in joint names with husband as primary member and wife as secondary member
• Husband puts in the entire amount

Who pays the tax?

Since the husband contributed the entire amount, he becomes the beneficiary of the interest earned. He will be liable to pay tax on FD in joint account according to his tax slab.

The tax liability will not be split with wife in this scenario.

Scenario 2: Husband gifts wife money, she puts it in FD

• Husband gifts ₹10 lakh to his wife
• Wife opens an FD with herself as first holder and husband second

Who pays the tax?

Again, husband will be paying the tax on interest earned as clubbing rule will apply here as per Section 64(1)(iv) of the Income Tax Act.

It could have been avoided had the wife used this gift to start a business or make a separate investment such as investing in equity. The income earned from this source would not have been directly from the gift, hence no clubbing rule applicability.

Scenario 3: Husband and wife out in 50-50 share in joint FD

• FD amount: ₹10 lakh
• Both husband and wife contribute ₹5 lakh each
• Proof of contribution exists with records of transfer from separate accounts in their respective names

Who pays the tax?

Since there is proof of transfer from two separate accounts in the husband and wife’s name, the tax liability will be split 50:50

TDS on Joint FDs: Who Gets Deducted?

While tax liability lies with the investor, TDS is a little tricky part. Generally, TDS on fixed deposit in a joint FD is deducted in the name of the first holder by default. Even if the second holder is the actual investor, the bank deducts TDS on the PAN of the first holder. The problem may occur since it leads to mismatches in:

• Form 26AS
• ITR Pre-fill
• Actual tax declaration

So how do you avoid TDS mismatches?

1. Submit PAN of the actual investor to the bank, no matter if they aren’t first holder.

2. File a declaration to the bank stating who the beneficial owner is.

3. While claiming interest in ITR, make sure the correct person adds the joint FD details

4. Attach a note in the ITR or CA letter for clarity, if needed.

Note: Form 15G/H (for TDS exemption) must also be filed by the beneficial owner, not just the first holder.

Why is it important?

You need to take care of these details as it may lead to:

• Wrong TDS deduction from someone else’s PAN and them getting IT notices
• Ignorance of clubbing rules
• Dispute among family members

Tips for Joint FD Tax Planning

Now that you know about all the complexities of taxation in Joint FD accounts, here are a few tips that will help you ease the process:

• Clarify ownership in documentation. Mention who contributed how much in the FD application.
• Use a separate PAN so that the bank is aware whose PAN to tag for TDS, even if they’re not the first holder.
• Don’t assume first holder is the taxpayer
• Clubbing provisions override joint holding so make sure your declarations and claims are rightly reflecting in IT forms.
• Keep proof of contribution (NEFT, UPI, cheques) to avoid tax ambiguity.

It is important to know about the tax implications in case of joint FDs to avoid any miscommunications and being flagged by the IT department. Know the rules properly and understand the ownership and investment onus carefully.