# Fixed Deposit Calculator: Income Clubbing Headache

Published: June 20, 2013 at 6:00 am

It is a terrible idea to open a fixed deposit in your spouse’s name with your money. In general, this arrangement is a terrible idea with any taxable instrument. Terrible, because of the complex way in which the interest income will be taxed. Of course this is applicable only if you are a law abiding tax paying citizen!

The tax man has laid specific rules with regard to taxation arising from income clubbing. This is a diverse area and has its own complexities.  Bemoneyaware has written a comprehensive article on this: Clubbing of income. I am only interested in two aspects of income clubbing that apply to taxable instruments (fixed deposits in the present case): (a) investing in the spouse’s name and (b) investing in the minor child’s name.

Many seem to think opening fixed deposits in their spouses name or minor child’s name will reduce their tax liability. Unfortunatelythis is not so. If we invest in the name of our minor child we still need to pay tax on the entire interest income. If we invest in our spouses name we will need to pay tax on the income generated from the sum transferred.

A simple illustration will hopefully make this clear: I transfer Rs. 100 to my wife. She opens a fixed deposit offering 10% interest per year (on April 1st). After a year the balance is Rs. 110. I will have to pay tax on Rs. 10 which is the income generated from the sum I transferred. At the end of the second year the balance is Rs. 121 (Rs. 110 plus 10% interest on Rs. 110). Out of the interest income of Rs. 11, Rs. 10 is the interest from (my) Rs. 100 and Rs. 1 is the interest from Rs. 10.

Rs. 10 is the income generated by my spouse from the Rs. 100 I gave her. I don’t need to pay tax on any subsequent interest generated from this Rs. 10 (he/she will have to if applicable).  I only need to pay tax on the income generated from Rs. 100, the sum I transferred. Trouble is, as long as the sum remains invested, I always need to pay this tax. Thanks to CA Nitin Soni for clarifying this. This scenario is also applicable if I had gifted the Rs. 100 to my daughter-in-law (but not son-in-law!).

Thus the tax liability on income clubbing with spouse (and daughter-in-law) is not zero but is not 100% either! Tax liability on income clubbing with a minor child is still 100%! Tax liability on income clubbing with a major child is zero! Unfortunately in this case, the parent’s access to the transferred sum and income generated is at the discretion of the child!

If I gift my spouse (or daughter-in-law) Rs. 50,000 and they subsequently invest this amount in a FD offering 8.5% interest (compounded quarterly) for say, 5 years, I need to figure out my tax liability (on Rs. 50,000) each financial year.  My spouse (or daughter-in-law) will have to figure out their tax liability (interest on interest earned) each financial year. Surely this is a headache for a law abiding tax paying citizen.

If my spouses slab is 10% or 20%, the 10% TDS implemented by the bank will further complicate matters. The bank will simply deduct 10% (10.3% to be exact) tax on the total interest earned unmindful of the above income clubbing provisions. If the spouse falls under the 10% tax slab he/she may have to seek a tax refund while filing returns for all years the FD is held. If he/she falls under the 20% slab the refund maybe applicable only for a few initial years. Additional tax will have to be paid for the remaining years!

I hope you now agree with me that income clubbing when a taxable instrument is involved is a terrible idea.

If your spouse (or DIL) holds a FD you can use this calculator to figure out individual tax liabilities (or refund) each financial year after accounting for TDS. Individual advance tax liabilities (if applicable) can also be computed.

If someone you know is practising such income clubbing unmindful of rules and complexities involved, do forward them this link.

Note:

• Suitable for FD durations in months and years
• If you have opened a FD in your minor child’s name, you need to pay tax on the entire interest income. You can use the Comprehensive Fixed Deposit Calculator – I to determine your tax liability.
• Advance tax is applicable only if the total taxable income from all sources exceeds Rs. 10,000 in a financial year. Here is a good read on the subject.
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About the Author M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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