Today I will share with you some tips to save tax on your fixed deposits in Bank.
Most of you would already know that, currently banks are offering Fixed deposits as high as @9.75% p.a. that is compounded annually to give you an annual yield of 10.11% p.a. Some banks are also offering 10.25% annual interest on your fixed deposits. This amount is subjected to tax deduction at source (TDS) @10.3%. Further as per your tax slabs, you need to pay the balance tax amount as self-assessment tax. Lets see how and under what conditions this tax can be saved.
Always make a fixed deposit in the name of those family members who satisfy all the following conditions:
1. The person should be at least 18 years old (Adult).
2. She should not be your wife.
3. The person is either
a. Not earning OR
b. Whose income, after adding such interest income is within the exempted tax range.
So, the ideal candidates, in the name of whom you can open fixed deposit accounts are your parents and your children above 18 years of age satisfying the above 3 conditions. You can gift the amount for fixed deposit to such members. The members need to then open a fixed deposit account in their name. Gifting money to your family members does not attract any gift tax. Gifting to wife and minor children also does not attract any tax but the income from such gifted amount is clubbed with your income. Hence you will not be able to save tax on that interest earned. That is the reason of conditions 1 and 2 above.
Lets see this by an example.
Suppose you have a child, who is 18 years of age and is studying. You gift an amount of 10 lakh to that child and open a fixed deposit in his/her name @9.75% p.a. After 1 year, he/she will earn Rs.101123 as interest on this fixed deposit. As the child was not earning, this entire amount is tax free in the hands of your child. Make sure to deposit for 15G with your bank to avoid TDS, else the bank will deduct TDS @10.3% and you will need to get refund of that from IT department.
In case of earning children e.g. earning Rs.1.2 LPA and the exemption limit is for example 1.9 lakhs. The difference of Rs.70000 (1.9L – 1.2L) can be earned as tax-free interest. So assuming like the above example, the interest of Rs.101123 will not be completely tax-free. The amount Rs.31123 (101123-70000) will be taxable unless and until the tax saving investments are done. In case you do the tax saving investments, then you can use that range also to earn tax-free interest.
Hope you like this post and get some benefit out of this.
Thanks for the article..its plain,simple and to the point.
ReplyDeleteOne question..suppose I take a 10 year FD of 10L which will mature to ~ 26L
in my father's name (who is > 60 and has no earning ), plus mark me as Nominee..
Will the whole 26L will be tax free ?
Each year my father has to submit 15H ?
Does he also has to file Tax return each year ?
Thanks,
Replying to comment dated Jan 2, 2012 01:21 PM
ReplyDeleteIn case of 10 year FD @ 10.25% p.a. (10.65% yield), only in the 10 year, the interest will be more than 2.5Lakhs. Hence assuming the current tax laws for next 10 years (keeping 2.5 Lakh as exemption limit for senior citizens)....
1. For 1-9 years the interest is completely tax free. For 10th year in amount of interest above 2.5Lakhs will be taxable. This can be saved by using 80C limit, as per current laws (if applicable after 10 years).
2. Yes you need to submit 15H at the beginning of each financial year.
3. You may file a return but its not mandatory for first 9 years. For last year you will need to file a return.
Please note that, as a rule, the tax on interest earned every year, needs to be shown in that year's IT return and tax should be deposited on such amount even if it is a cumulative FD. But you need not worry for first 9 years at least.
Also note that tax related aspects are as per current tax rules. They will change for sure in future.
Hope it clarifies.
Is there any tax implications if that money need to be gifted back to the person by parent after the FD duration? Also, any tax implication if the parent expires and money gets back to the person as nominee?
ReplyDelete@Estheppan There are absolutely no tax implications on any gift that is gifted back to a relative. The only requirement is that the gift should be executed with a gift deed in both ways. The person gifting the money should sign the gift deed and the person receiving the money should accept it.
ReplyDeleteIn case of death of person, the legal heir of that person should file a return on behalf of deceased person and deposit any tax that the person was liable to pay out from the deceased person's money. From the day , the nominee get the money, the returns on that money will be taxable as per nominee's own taxable income but the actual amount is still tax free.
Thanks @Gaurav. Informative post in simple words. I am gona implement this idea.
ReplyDeleteHi Gaurav,
ReplyDeleteInfo posted by you is really helpful. I have a query here.
1) Can the FD be made in the name of wife if she is not working. If not why ?
2) current FD rate is 9.25%. How much maximum can i invest for 1 year so as to get tax free returns
Thanks
Pankaj
@Pankaj_B You cannot directly transfer funds in the name of your wife. In case you do, the income generated from that will be clubbed with your income. In case your wife has funds in her name, then you can make an FD out of that money to enjoy tax free returns. The source of funds could be a gift in her name from your relatives or even parents.
DeleteFor the second query, at current year's tax slab of Rs.2 Lakhs you can invest about Rs.20.88 Lakhs in FD to get full benefit, but I don't think you would like to invest such a huge amount in first year itself.
Hello Sir,
ReplyDeleteWith reference to your example above, I am above 18 years of age and unemployed. Suppose I get a gift of Rs 5 Lakhs from my father and I invested the same into fixed deposit schemes of various bank, such that interest earned on none of them is above Rs 10000.
Now my query is that, Will this gift of Rs 5 lakh and interest earned on it will be considered as my earning and I will be kept under a tax bracket and I have to pay Income tax on it. (Mentioning that my pan no is updated with all the banks, where I have invested the money). If not, does my father need to pay any tax on these earnings?
One more question, Consider the same situation discussed above with me now under employment and earning 3.5 Lakhs annually. Do I need to mention the gift or its interest while filing the IT return?
Thanks,
Sumit
For the fist case: Yes, you can receive the gift from your father and have the amount invested in bank FD. Even if the amount of interest is more than Rs.10000, you do not need to worry. All you have to do is submit the 15G form with the bank to avoid TDS.
ReplyDeleteThe income from FD will be your income and if that income + income from other sources is less than exemption limit, no tax is applicable. Your father has no liability in any case if you are above 18 years of age.
Now for the second case, you are earning and now this income will be added to your other income and will be taxed jointly over and above the exemption limit. When ever you file your return, you should mention the FD interest income and deposit the applicable tax, if any.
Thanks for your response, it had made the doubts clear but I just need to confirm one thought that the Income you are referring is only stuck to interest earned on FD. But what about the principal of 5 lakh in both the scenarios.
DeleteYour father already paid tax on that 5Lakhs when he earned that. There is no further taxation of that principal sum in any case.
DeleteYes, Got it. Thanks for the info.
DeleteI hava a question, If i do a FD of 1.48 laks on dated 23 Dec 2012 for 1 year 3 day's @9.75% in HDFC back (Interest is Quaterly routed to my saving Account). will TDS be deducted from bank.
ReplyDelete