Fixed Deposit Calculator: Income Clubbing Headache

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!).

His and Hers Garages
(Photo credit: jessamyn)

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.

Download the FD calculator


  • Suitable for FD durations in months and years
  • The file refers to ‘Giftor’ and ‘Giftee’. Giftor is the person gifting or transferring the money. Giftee is the person (spouse or DIL) receiving the money
  • 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.

12 thoughts on “Fixed Deposit Calculator: Income Clubbing Headache

  1. Sir, If Wife is working and she is also earning, how it is possible to confirm that amount in FD belongs to Husband (If FD is in Wife name). Clubbing should be when wife has no money (or not earning), then it is confirm that amount in FD belongs to Husband. My doubts is why husband has to pay tax if amount belongs to wife (assuming genuine case) Please clarify

    1. If you give your money to your wife, whether she is earning nothing or ten times more than you, it is still your money and you should pay tax on the income generated from that money. Those are the rules. Every citizen is expected to follow that.
      You cannot selectively say income clubbing is applicable only when wife is not working.

      Of course if the money is genuinely the wife’s then the husband has not tax role to play.

      1. Sir, I confused. You are saying every citizen has to follow irrespective of wife’s earning.But you are also saying in genuine case husband no need to pay tax. Please clarify. How IT will confirm genuine case? Please clarify.

        1. If you give some money to wife and she invests it, you need to pay tax. It does not matter whether she is working or not. What is confusing about that?

          A genuine case is one in which you don’t give her money and she uses her own to invest.

          IT dept may or may not check whether FD in wifes name is from your money or her money. That is not the point. If YOU have given her the money to invest YOU need to pay tax. That is the rule.

  2. ‘This scenario is also applicable if I had gifted the Rs. 100 to my daughter-in-law (but not son-in-law!)’
    just to add: (even not to son!).

  3. A gem of an article.
    Just clarifying for clubbing of income of minor child from my article Clubbing of Income
    An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each minor child if the income of such minor as included under section 64 (1A) exceeds that amount. However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

  4. Suppose i gift a certain amount to my wife and she invest it in FD for aperiod of 1 year, so i have to pay tax on the interest earned for that 1 year. Now suppose she agains reinvest the principal amount for another 5 years, so now the income thus generated will be clubbed in my income or will be it be taken as income of my wife?

  5. Hi, I just landed on your page. I need your suggestion. My spouse gave money 2L and I invested on a company for interest and got money back last year. As investment is on my name company deducted TDS under my PAN. Due to slab, the TDS deducted is not complete and I might end up paying more tax. In this situation, Can I get refund of TDS detected with not declaring this money but asking my spouse to declare this money with interest as other income and pay tax? This way can i avoid paying excess tax and also ensuring tax paid for the amount (interest out of 2L) earned? Thanks in advance

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