Tax Implications on Spousal Fixed Deposits Clarified for Retirees

A recent clarification from tax authorities impacts how interest income from a spouse's fixed deposit (FD) is treated for tax credit purposes, particularly for retirees. Under existing clubbing provisions, interest generated from an FD held by a spouse, where the principal was contributed by the other spouse, is considered taxable income for the contributing spouse, not the holder of the FD. This means that if a retiree invests in an FD under their spouse's name, the interest income will be clubbed with the retiree's income for tax assessment. Consequently, the spouse holding the FD is not eligible to claim tax credits or furnish Form 15G/15H declarations on this specific interest income. These forms are typically used by individuals, including senior citizens and retirees, to declare that their income is below the taxable threshold, thus exempting them from Tax Deducted at Source (TDS) on interest earnings. The inability of the spouse to furnish Form 15G/15H implies that TDS will be deducted from the interest income by the bank if the interest exceeds the statutory limit. The tax liability for this clubbed income, however, remains with the original investor (the contributing spouse). This clarification aims to prevent potential tax avoidance strategies by ensuring income is taxed with the individual who effectively generated the capital for the investment. For retirees relying on FD interest as a primary income source, this mandates careful planning regarding whose name fixed deposits are held in and who is the actual source of funds, to optimize tax outcomes and ensure compliance with TDS regulations.