Excluding interest income on FDs can hurt
Most forget to include this in their taxable income, especially when it is in their wives' or children's names
Armed with bank deposit data after demonetisation, the income tax (IT) department has increased its scrutiny on depositors who don’t report their interest income when filing returns. While a few might deliberately hide such income, most taxpayers fail to report such income as they are not aware of the regulations surrounding taxation of interest income.
“The biggest misconceptions are about clubbing of income. Most individuals don’t know when the interest income earned by wife or children needs to be clubbed with theirs,” says Naveen Wadhwa, general manager, Taxmann.com.
If there’s a deposit in the name of children or a wife who is a home maker, the interest earned is clubbed with the income of the husband. Known as clubbing provisions, an individual needs to treat the interest income from deposits as his own if they are in the name of children or a wife who is not earning. If the partner is working, and you gift her money that she invests in a fixed deposit, the returns will still be clubbed with the husband’s income.
If both parents are working, income from deposits in the name of minor children (below 18) is treated as income of the parent who earns more. There is, however, a small exemption of ~1,500 per child per year, for a maximum of two children.
In many cases, individuals deposit funds in the name of a wife who is a homemaker. Then, they fill up Form 15G— a declaration that the depositor is not in the taxable limit. The tax department can track down such tax avoidance and issue a notice based on the permanent account number (PAN) linked to the deposit.
There are some who break a deposit into smaller amounts and park it with different banks in their wife’s name, say experts. Instead of depositing say, ~10 lakh, they deposit , ~2 lakh in five banks. Then, they fill up Form 15G to avoid paying taxes. Even such deposits are easily traceable for the authorities. “If the department finds out that Form 15G was misused, there would be consequences. There’s provision for a penalty and prosecution,” says Archit Gupta, CEO and Founder of Cleartax.in.
Many also believe that if a bank has deducted tax at source, there’s no need to pay any further tax on interest income. The government has the mandated tax deduction at source (TDS) only to keep a trail of the money. Banks deduct just 10 per cent tax. The information about the TDS is also available at the tax filing portal in a document called Form 26AS. An individual’s tax liability is nil only if he is in the lowest tax bracket, as the interest is added to a taxpayer’s total income. But, if you are in the 20 per cent or 30 per cent tax bracket, you will need to pay the balance tax when filing returns. If you are in 20 per cent tax bracket, for example, you will need to pay 10 per cent more tax on the interest earned. Also, if an individual receives more than , ~10,000 in a savings account as interest, the money is liable for tax. To save on tax, an individual can gift money to parents who are not earning, who can then make a deposit. The only problem in such a case is if the parents die, siblings can ask for a share of such deposits.