Taxes on Multiyear Bank Fixed Deposit

r2i_puneite · Post by **r2i_puneite** » Fri Jun 01, 2007 7:22 pm

Hi,

How do taxes on multi-year Fixed Deposits work in India ? For example, lets suppose that I invest Rs10Lakhs in a bank fixed deposit at a rate of 10% for a 2 year period. The interest on this would be around Rs1lakh per year. Can this amount be shown as interest income for year 1 (even though the FD has not matured) ?

Reason I ask is - if it is possible to show interest income on a yearly basis for a multi-year deposit, there might be tax advantages. Assuming that I have no other income, the Rs 1 lakh makes me fall under the tax bracket and so I have to pay no taxes for either year 1 or year 2. However, if the yearly interest cannot be claimed, then in Year 2 I have an income of Rs2lakhs, which would bump me above the lowest tax bracket.

I know in the US, you get a 1099 for every year which shows the interest earned that year, even if your CD has not matured. Does India have a similar policy ?

Real reason for asking this is - if someone has 2 kids, they can get a FD in each of the kids' names for Rs10lakhs each (at 10% interest) and completely avoid taxes on capital of Rs20lakhs. Is this legal ?

What am I missing ? Thanks in advance.

Desi · Post by **Desi** » Sat Jun 02, 2007 1:27 am

You are required to report as they accrue, which means every year.

Any interest on the amount that you gift to the child will be clubbed to your income.

There is nothing illegal in gifting to child and opening a CD in child's name. however you cannot escape taxes if you gift to your child.

r2i_puneite · Post by **r2i_puneite** » Sat Jun 02, 2007 7:07 pm

Thanks Desi.

How about in the case of a non-working spouse ? Is that income also combined ? For example, my wife used to work in the US and has savings from that income. Once we r2i, she will not be working (at least for a while) - could we take a FD in her name and use that to save on taxes ? Or would her interest income also be clubbed with my income ?

Bobus · Post by **Bobus** » Sun Jun 03, 2007 12:36 am

r2i_puneite;27153Thanks Desi.

How about in the case of a non-working spouse ? Is that income also combined ? For example, my wife used to work in the US and has savings from that income. Once we r2i, she will not be working (at least for a while) - could we take a FD in her name and use that to save on taxes ? Or would her interest income also be clubbed with my income ?[/quote]

No, the income you have described above will not be clubbed.

It is only if you gift assets to wife that the income from those assets will be clubbed with yours. If wife acquires an asset from other sources - gift from a third party or inheritance or by working - then the income from the asset is not subject to clubbing with yours.

Desi · Post by **Desi** » Sun Jun 03, 2007 4:21 am

R2i_Puneite.

The following 3 links can serve as a reference for you in the future.

Spouse and Minor Children
Clubbing of other incomes
Queries & answers
http://incometaxdelhi.nic.in/taxsys/proc2.htm

blrbound · Post by **blrbound** » Wed Jul 18, 2007 10:49 am

BUMMER !!!
Looks like we cannot open an account on non working spouse name and take tax advantage. But one thing I dont understand is if a spouse stops working after R2I and he/she transfers money from US bank to India account, is it OK to file taxes seperately and take tax advantage. But then how can we prove that this money came from Spouse job. Should we show some pay checks to prove that, dont you think this is ridiculous.

Any one any guesses how this is dealt in India ?
Any Indian tax gurus in this forum.

thanks,
BB

Bobus · Post by **Bobus** » Wed Jul 18, 2007 11:04 am

#6:

Say W (woman) works in US, earns money, accumulates assets from that money and upon R2I stops working. Any income that W gets from the assets so accumulated by W are W's income - this income will not subject to clubbing of income provisions i.e. it will not be taxed as some other person's income.

The issue of proof that the assets came from W's earnings will arise in the event there is an audit - and yes at that stage it will help to show some documents that show that they came from W's earnings - it can be pay slips, W-2, bank statements, ... and no it is not ridiculous.

I would be surprised if the links posted in #5 do not address the above.

desihometown · Post by **desihometown** » Mon Jul 23, 2007 11:47 pm

Bobus and others,

I have a question regarding this. Say, I have a rental property in India
that generates around Rs3Lakh per annum.

Does India allow married & filing taxes (with spouse) jointly like in US ? The reason Im asking the question is, in that case, we wont have to pay taxes till Rs 2.2Lakhs
(1.1+1.1) right ? We have to pay taxes on the rest of the 80 thousand rupees right ?

Another question is, is the PPF in INdia like 401K in US, in that can one get tax exemption for the Rs75,000 or so one can contribute per annum? (I already had a PPF account before I came to the US but I had no idea about taxability etc. when I was enrolled in it. (had just graduated from college. Did whatever the finance dept. asked me to do :-)

Bobus · Post by **Bobus** » Tue Jul 24, 2007 11:19 pm

desihometown;35462 Say, I have a rental property in India
that generates around Rs3Lakh per annum.

Does India allow married & filing taxes (with spouse) jointly like in US ? The reason Im asking the question is, in that case, we wont have to pay taxes till Rs 2.2Lakhs (1.1+1.1) right ? We have to pay taxes on the rest of the 80 thousand rupees right?

Another question is, is the PPF in INdia like 401K in US, in that can one get tax exemption for the Rs75,000 or so one can contribute per annum? (I already had a PPF account before I came to the US but I had no idea about taxability etc. when I was enrolled in it. (had just graduated from college. Did whatever the finance dept. asked me to do :-)[/quote]

Desihometown:

Bad News

No concept of joint return in India. Husband and wife have to file separately.

Good News

If you opened the PPF account as resident, then even after becoming non-resident you can continue to contribute (I think it is 70K per year max) and claim it as a deduction. Another 30K of deduction is allowed (total max 1 lac) via other eligible specified Section 80C investments per year.

Against rental income, you can claim an automatic deduction of 30% of rental income (without proof of expense) towards repairs and maintenance.

All of the above is about India tax. US tax on the above (for US resident) is a different animal.

desihometown · Post by **desihometown** » Mon Jul 30, 2007 3:18 am

Bobus;35694Desihometown:

Bad News

No concept of joint return in India. Husband and wife have to file separately.

Good News

If you opened the PPF account as resident, then even after becoming non-resident you can continue to contribute (I think it is 70K per year max) and claim it as a deduction. Another 30K of deduction is allowed (total max 1 lac) via other eligible specified Section 80C investments per year.

Against rental income, you can claim an automatic deduction of 30% of rental income (without proof of expense) towards repairs and maintenance.

All of the above is about India tax. US tax on the above (for US resident) is a different animal.[/quote]

Thanks Bobus. One other question is, can the rental income be split ? In other words, can my wife and I be the joint recipients of the rental income, so that we can split the income as Rs1.5Lakhs each ?

Thanks
DHT