Fixed Deposits (FDs) are one of the most trusted and widely chosen investment options for families in India. Many people prefer to open joint FDs with their spouses to ensure safety and easy access to funds. However, very few are aware that such arrangements can have serious income tax implications. If the rules are not understood properly, the Income Tax Department may even issue a notice regarding the interest earned on the deposit.
What Happens in a Joint FD?
A joint FD allows two individuals, usually husband and wife, to open a fixed deposit account together. The deposit amount can be contributed by one or both individuals, but the ownership and interest credit can create confusion when it comes to taxation. Most people assume that since the FD is joint, the tax burden will also be shared equally. This assumption often leads to unexpected income tax notices.
Who Has to Pay Tax on FD Interest?
According to income tax laws, the tax liability on the interest earned from a joint FD falls on the person who has contributed the money to the deposit. For example, if the husband deposits the entire amount in a joint FD with his wife, then the interest income will be considered his income, not his wife’s. This income will be taxed under his applicable slab rate.
If both husband and wife contribute different amounts to the FD, then the tax will be calculated in proportion to their individual contributions.
How Tax is Calculated in Joint FD
The table below explains how tax liability works in different cases:
| Scenario | Contribution Source | Who Pays Tax on Interest? |
|---|---|---|
| Husband contributes 100% | Husband only | Husband |
| Wife contributes 100% | Wife only | Wife |
| Both contribute 50-50 | Equal share | Each pays tax on their 50% interest income |
| Husband contributes 70%, Wife 30% | Unequal share | Husband pays tax on 70% interest, wife on 30% |
Why Income Tax Notices Are Sent
Income Tax notices are sent when there is a mismatch between the PAN linked to the FD and the actual contributor of funds. For instance, if the FD is in joint names but only the husband has invested, and the bank credits the TDS in both names, it can create discrepancies in income reporting. This mismatch often triggers notices from the Income Tax Department.
Clubbing of Income Rule
Under the Clubbing of Income provisions, if one spouse does not have independent income and the other spouse invests in their name, the income generated from such investments will still be added to the income of the earning spouse. This means that just by putting the FD in the wife’s name, the husband cannot escape tax liability if he is the one funding the deposit.
How to Avoid Trouble from the Tax Department
Investors must be transparent while declaring the source of funds for joint FDs. Properly disclosing the contribution ratio and linking the correct PAN numbers to the deposit will help avoid unnecessary notices. If a spouse genuinely contributes from their own income or savings, they should maintain proper records for proof in case of queries from the tax department.
Conclusion
Opening a joint FD with your wife may seem like a convenient option, but it carries important tax implications. The Income Tax Department keeps a close watch on interest income, and any mismatch can lead to notices. Hence, it is better to plan smartly, declare contributions clearly, and pay the rightful tax to stay safe.
