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Section 64 (1)(iv) Tax Implications of FD Investments in Spouse's Name in India: A Case Law

Introduction:

The case presented revolves around an individual (the assessee) who has invested INR 500,000 in a fixed deposit (FD) in his wife's name during a particular financial year. The wife, a non-earning housewife, does not have her own income source and is not an individual tax assessee. The assessee wishes to avoid reporting the interest accrued on this FD on his income tax returns. This analysis aims to provide clarification and advice on this matter.



Facts of the Case:

The assessee is a resident individual who has invested in an FD in the name of his wife, who has no independent income. He does not wish to report the interest income generated from this FD on his own income tax returns.



Issues:

  1. Who is liable to pay tax on the interest income generated from the FD?

  2. What are the implications under clubbing provisions of the Income Tax Act, 1961?

  3. Can the assessee legally avoid reporting this interest income?


Rule of Law: Section 64 (1)(iv) Tax Implications of FD Investments in Spouse's Name

Clubbing of Income:

According to Section 60-64 of the Indian Income Tax Act, 1961, in certain circumstances, the income of one person is included (or clubbed) with the income of another person, and the tax is levied as per the tax slab rate of the person in whose hands it is included.

Under Section 64(1)(iv) of the Act, if a person transfers asset or money to his or her spouse without adequate consideration, any income from this asset is deemed to be the income of the transferor (the person who transferred the asset or money).


Fixed Deposit Interest Income:

As per the Income Tax Act, interest earned from an FD is taxable under the head 'Income from Other Sources'. It is taxable according to the individual's tax slab rate. If the total income is below the taxable limit, no tax is levied.



Application and Discussion:

Clubbing Provisions:

Applying the clubbing provisions to this case, since the assessee has invested his funds in an FD under his wife's name, the interest income generated from this FD is liable to be clubbed with the income of the assessee and taxed as per his slab rate. This is because, as per Section 64(1)(iv), the transfer of funds to the spouse is viewed as a transfer without adequate consideration.


Taxation of Interest Income:

The interest income generated from the FD is taxable under the head 'Income from Other Sources'. Therefore, the assessee is liable to report this income in his tax return and pay tax on it according to his slab rate.


Avoiding Taxation:

As for the issue of whether the assessee can avoid paying tax on this income, it's critical to clarify that evading tax liabilities is not permissible under the law. However, efficient tax planning can be implemented to minimize the tax liability while staying within the boundaries of the law.



Conclusion:

In light of the above discussion, it is clear that the assessee cannot avoid reporting the interest income accrued from the FD, as it is liable to be taxed under his slab rate as per the clubbing provisions of the Income Tax Act. Any attempt to evade tax liability could attract serious implications for fd investments under the Section 64 of the Act.


It's also worth mentioning that the tax liability could be reduced if the income from the FD does not push the total income of the assessee into a higher tax slab. If this is the case, no additional tax would be payable on the FD's interest income. However, the income still needs to be reported in the tax return.


Efficient tax planning, such as investing in tax-saving instruments or spreading the investments over different financial years to avoid pushing the total income into a higher tax slab, can be an effective strategy for minimizing tax liability. However, such tax planning needs to be conducted within the framework of the law to avoid potential penalties.


Please note, any tax planning strategy should be implemented after careful consideration and consultation with a tax consultant or advisor to ensure it aligns with the individual's financial situation and goals.

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