Simplified Laws Guide to Taxation and Legal Concern The known fact is that the Interest Income on Bank Fixed Deposits is subject to Income Tax. The lesser known fact is that there are options through which you can save tax on Interest. We wouldn’t have thought about writing this article but for Mr. Sri Krishna’s query.
Mr. Sri Krishna, an employee working in a software company wants to know the best tax saving option forinvesting Rs.3 Lakhs in a Fixed Deposit of a bank. He is earning Rs.15 Lakhs as his annual Income. He is married and has two children, a daughter aged 18 years and a son aged 14 years. His father, 65 years is also staying with him. Apart from him, there is no other earning member in his family.
So let us have a look at the various routes through which Mr. Krishna can park his funds in such a way that he has legally the most minimum tax liability.
Investing in his name
If Mr.Krishna invests in his name, he will have to pay 30% tax on the Interest income which he earns in the year (Let us assume, Interest is computed at 9% p.aon Rs 3 lakhs I.eRs 27,000 per year) so, it is not a good option
Investing in the name of his wife
SupposeMr. Krishna invests in the name of his wife.Still he would have to pay 30% tax on the Interest income which he earns in the year because as per the Income tax act, the interest earned by the spouse would be clubbed in the income of Mr. Krishna.
As per the Section 64(1)(iv) of Income tax act 1961-
In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—
i. …..
ii. …..
iii. ……
iv. subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart
So, as per the above provision, the interest earned by Mr. Krishna’s wife shall be deemed to be the income of the taxpayer (i.e., Mr.Sri Krishna) and hence Mr. Krishna has to show this as his income and pay the taxes accordingly. It is not a good option
Investing in the name of his Son(Who is a minor):
Say Mr. Krishna invests in the name of his son, still he would have to pay 30% tax on the Interest income which he earns because as per the Income tax act, the interest earned by his minor son would be clubbed in the income of Mr. Krishna.
As per the Section 64(1A) of Income tax act 1961“In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.So, this is not a good option
Investing in the name of his Daughter (Who is a Major):
Suppose Mr. Krishna invests in name of his daughter who is more than 18 years old & not earning. This would be a major tax benefit for him. The interest income earned in the name of his daughter would be taxable in her hand and not in his hands.
However since daughter is not earning income above the basic tax exemption limit (BEL)ofRs. 2 lakhs, she also need not pay tax She can submit “Form 15G” to the bank for Non deduction of tax (TDS) This is a Good option (Read Know about Form 15G & 15H]
Investing in the name of his Father’s Name
Suppose Mr. Krishna invests in name of his Father. This too would be a tax benefit for him. The interest income earned in the name of his father would be taxable in his hand and not in Krishna’s hands.
He father can submit “Form 15H”to the bank for Non Deduction of tax (TDS). This is also a good option [Read Know about Form 15G and 15H].
