In order to earn secured fixed income, Fixed Deposit is one of the best options with proper liquidity.
The only drawback of FD is that it is not tax efficient. You have to pay full tax as per your Income Tax slabs on the Interest earned on Fixed Deposit.
To reduce the tax liability – some people try to transfer the income on somebody else’s name in whose hands the tax liability is lower.
This can be explained with the help of an example.
Mr. Akhil (son) is a PSU employee and comes under 30% Income Tax Slab and Mrs. Maya (mother) is in the 0% tax slab as she does not have any income. Mr. Akhil does a FD of Rs. 10 Lakhs and earns 6% Interest every year i.e. he receives interest of Rs. 60,000 every year.
Now as Mr. Akhil is in the 30% Income Tax Slab – he would be required to pay Income Tax @ 30% on this additional income of Rs. 60,000 earned as interest i.e. 30% of Rs. 60,000 = 18,000.
However, if this income of Rs. 60,000 was earned by Mrs. Maya – no tax would have been levied on such income as Mrs. Maya falls in the 0% tax slab. To avoid income tax in this case, Mr. Akhil transfers money to his mother Mrs. Maya and the mother in turn does the FD from this money.
In such case, the taxability shall be in the manner as below:
Transfer of Money from son to Parent (Mother/ Father)
When Rs. 10 Lakhs is transferred by Mr. Akhil to Mrs. Maya – no tax would be levied on transfer of this money as this is a gift from son to parent.
Parent and Child are considered as a specified relative under the Income Tax Act and any gift from them is not chargeable to Tax.
Mrs. Maya is free to use this money for any purpose. In the above example – Mrs. Maya has used this money to create a fixed deposit.
Tax on Interest earned by Parent (Mother/Father)
In the above example, the interest earned by Mrs. Maya would be charged to tax @0% as she is in the 0% tax bracket.
Therefore, by doing this transaction – Mr. Akhil was able to save tax on the interest earned. Moreover, there is no risk of money as this money is with her mother itself.
To add to this, if the mother is a senior citizen – the bank would also give her additional interest as the interest rates on FD for senior citizens are higher.
To avoid TDS on Fixed Deposit – the mother can also submit Form 15H as her total income is not chargeable to tax.
Just like Mr. Akhil did this transaction with Mrs. Maya to save tax, similarly transactions can also be done with the following relatives to save tax:-
Gift to Father/ Mother Gift to major Child
However, such transactions of gifts cannot be done with the following relatives as the provisions of Clubbing of Income would get applicable:-
Gift to wife Gift to son’s wife Gift to Minor Child
Such transactions cannot with non-relatives as transfer of money to non-relatives (whether as gift or otherwise) would attract income tax in the 1st instance itself i.e. at the time of transfer.