Tax on FD in Joint Accounts: Who Pays How Much? {update}

What is a Joint FD?

A joint FD account is a fixed deposit that has more than one holder. For example, you may open an FD with your spouse or parent as a joint holder. In this case, both names are mentioned in the deposit. However, only one person is considered the real owner when it comes to taxation.

Many people believe that the first holder is responsible for paying the tax. But this is not true. The Income Tax Department looks at who actually provided the money for the FD.

Who Pays the Tax?

The rule is simple. The person who invests the money in the FD has to pay the tax on the interest income. This person is called the “beneficial owner.”

The order of names in the FD account does not decide tax responsibility. Even if you are the second holder, if you have funded the FD, you are the one who will be taxed.

For example:

• If a husband opens a joint FD with his wife and funds it fully, the husband will pay tax on the interest.
• If a wife opens a joint FD with her husband and invests all the money, the wife will pay the tax.

In case both people contribute to the FD, the interest earned should be divided according to the contribution. So, if both contribute 50%, each will be taxed on 50% of the interest.

Scenario Example

Let’s say Mr. Raj and Mrs. Priya open a joint FD of ₹10 lakhs for 1 year at 7% annual interest. Mrs. Priya is mentioned as the first holder, and Mr. Raj is the second holder. The interest earned in one year is ₹70,000.

Now, who pays the tax?

If Mr. Raj funded the FD from his own bank account, then Mr. Raj will be taxed on the ₹70,000 interest. Even though Priya’s name is listed first, she is not responsible for the tax because she didn’t contribute the money.

However, the bank will deduct TDS on FD interest using Mrs. Priya’s PAN. This means TDS will reflect in her Form 26AS. In this case, Priya can declare that the interest does not belong to her while filing the return, and Mr. Raj can include the interest in his own income and claim the TDS.

If both Raj and Priya had contributed ₹5 lakhs each, they should split the interest ₹35,000 each. Both should include this interest in their respective income tax returns.

What Happens in Case of Minors?

If you open a joint FD with your child and the money belongs to you, then you are taxed on the interest. If the child is a minor, the interest income is added (clubbed) with the income of the parent who earns more.

However, there is a small relief. The first ₹1,500 of interest earned per year per child is exempt from tax under Section 10(32) of the Income Tax Act.

TDS on Joint FDs

Banks deduct Tax Deducted at Source (TDS) on FD interest when it crosses ₹40,000 in a year (₹50,000 for senior citizens). This TDS is deducted using the PAN of the first holder. But tax liability is still based on who funded the deposit.

This creates a problem if the first holder is not the one who invested the money. TDS gets reflected in the first holder’s Form 26AS, but that person may not have any tax to pay. In such cases, the correct owner must claim the income and adjust it in their income tax return.

How to Handle Such Situations?

Here are a few tips to avoid confusion:

1. Try to use the PAN of the person who is funding the FD as the first holder.
2. Keep records of the source of funds, like bank transfers or cheque payments.
3. If both holders are contributing, clearly mention the share of contribution.
4. While filing returns, the person who earns the interest must show it as their income, even if TDS appears under the other person’s PAN.

Also read: How to Claim TDS in ITR If PAN Holder Is Different

Summary

Joint FDs may look simple on the surface, but the tax treatment depends entirely on who invested the money. The Income Tax Department does not go by whose name appears first in the account. Always remember, the person who funds the FD is responsible for the tax on interest income. Understanding this rule can help you avoid future tax complications and file your returns correctly.

If you’re planning to open a joint FD, keep these tax rules in mind. It’s always better to plan your investments and tax responsibilities in advance.

For more help on FD taxation, visit RBI FAQs on Deposits.

Disclaimer
This article is meant for general informational purposes only and does not constitute legal, financial, or tax advice. Tax rules may change based on government notifications or individual cases. Readers are advised to consult a qualified tax consultant or financial advisor before making any financial decisions or filing returns.

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