10 Common Myths Surrounding Fixed Deposits and Earned Interest

Fixed Deposits, also called as Term Deposits, are one of the most traditional investing options. While we may be hearing a lot of noise around Mutual Fund SIPs, Liquid, Balanced and Debt Funds, Stock Picking, Tax Free Bonds, PPF, EPF etc, the fact of the matter is that nothing can beat the assurance and simplicity of a Fixed Deposit. Though tax inefficient and not the best returns provider, fixed deposits do deserve their own pie in your portfolio. Tell me whether there is any other investment option you know which is as simple, assured, liquid, monitoring free and risk free - all rolled in one - as a Fixed Deposit? There is actually none. It does come at a price of tax inefficiency and slightly lower returns, but in quite many cases - returns may not be the only criteria to decide on your investments.

So, if you have started to feel happy that all that chunk of Fixed Deposits lying almost unattended in your bank accounts is now justified, let me throw a word of caution here. Your Fixed Deposit is earning interest. Bank may be deducting some tax as well (TDS). But you may be liable for more tax. And if you have not been paying that, you might be in for deep trouble. Yes, at the time of filing your Income Tax Returns, you are liable to calculate the additional tax that you need to pay from your Fixed Deposit interest - and then pay it as well. This may be completely over and above the TDS that the banks may have deducted. If you have been ignoring that, then I am sure you also understand that ignorance of law is never an excuse. Inefficiently managed interest accrued from your Bank Fixed Deposits can actually land in you in deep trouble with the taxman.

Let us remove some of the common myths surrounding the Fixed Deposits and the interest accrued out of them:

Myth 1

Fixed Deposit interest is hidden from the taxman

Fact 1

All Banks report the interest accrued against your PAN Number to the IT Department. So, gone are those days when banks and their branches were disconnected. Today, in this interconnected world of PAN and Adhaar, there is no way you can escape from the prying eyes of the taxman.

Myth 2

Bank has already deducted TDS - so, you don't need to pay any more tax

Fact 2

Banks deduct only 10% of the interest earned as TDS, or 20% if you have not provided the PAN Number to the bank. But you may actually be liable for more. It all depends on your total income in the financial year. If you fall in the 30% tax bracket, then you are liable to pay 30% tax on the interest earned from fixed deposits - after adjusting for 10% or 20% TDS that may already have been deducted by the bank. If you are in the 20% tax bracket, and the bank has deducted only 10% TDS, then you are liable to pay another 10% tax on the interest that you have earned.

Myth 3

You have submitted Form 15G/H - so there is no tax liability

Fact 3

Form 15G/H has a very specific purpose wherein you are confirming to the bank that you are not likely to fall even in the 10% tax bracket in the current financial year - and hence you are requesting the bank not to deduct TDS. But if that does not turn out to be true by the end of the financial year, you got to pay tax as per the tax slab you fall in.

Myth 4

Your interest is less than Rs 10,000 in a financial year and thus there is no tax liability

Fact 4

Even INR 1 interest earned from Fixed Deposits is liable to be taxed, unless of course you fall in 0% tax slab. This exemption of Rs. 10,000 is not applicable on Fixed Deposit interest. This exemption is only available for interest earned out of the money idling in your savings account. So, you are liable to be taxed even if your interest income is less than INR 10,000. The only benefit you have is that the bank will not deduct any TDS till the interest crossed INR 10,000. Even if that is the case, you will need to pay the applicable tax at the time of filing ITR.

Myth 5

I have a recurring deposit. Interest is not taxable here

Fact 5

100% incorrect. Whether it is FD or RD, every single rupee of interest earned is taxable as per your current tax slab

Myth 6

I have invested in a 5 year Tax Free FD. It will not be taxed now

Fact 6

Quite contrasting to their name, Tax Free FDs are actually NOT tax free. Yes, they don't help you save tax from your interest income earned out of the fixed deposit. They do help you save tax by showing the principal investment under Section 80C, just like you may save tax by showing EPF or PPF investment under Section 80C. However, every single rupee of interest is taxable as in any normal fixed deposit.

Myth 7

National Savings Certificates (NSC) or Kisan Vikas Patras (KVP) are tax free

Fact 7

Again, none of this is true, and every single rupee of interest is taxable as in any normal fixed deposit.

Myth 8

Senior Citizen Deposit Scheme is Tax Free

Fact 8

Again, none of this is true, and every single rupee of interest is taxable as in any normal fixed deposit.

Myth 9

I have invested in an FD in my wife's name. So, I am saved of any taxes.

Fact 9

Money gifted to a spouse does not attract tax. But if that money is invested, the income it generates is clubbed with the income of the giver and taxed accordingly. If a husband has invested in fixed deposits in the name of his wife, the interest will be taxed as his income. So, better avoid wasting your time and effort.

Myth 10

I have invested in my child's name. So, I am saved of any taxes.

Fact 10

Money gifted to a child does not attract tax. But if that money is invested I the name of aa minor child, the income it generates is clubbed with the income of the giver and taxed accordingly. If a father has invested in fixed deposits in the name of his minor child, the interest will be taxed as his income. So, better avoid wasting your time and effort. In case of children though, there is a small exemption of Rs 1,500 per year per child for a maximum of two children.

Calculate the Tax payable on FD interest

1. Calculate your total interest income from all the Fixed deposits in a financial year. Say, it is INR 50,000

2. Find your tax slab (based on your total income - which includes all sources of income, including FDs). Say, it is 20%

3. Based on 1 and 2 above, calculate the tax payable on FD interest. It will be 20% of 50,000 = INR 10,000

4. Check Form 26AS to see the TDS already deducted. Assuming it was deducted at the standard rate of 10%, it will be INR 5,000

5. Additional Tax payable at the time of filing ITR = INR 10,000 (as per 3) - INR 5,000 (as per 4) = INR 5,000

How do I file Tax for interest income?

Report the total interest as "Income from other Sources"

In the ITR form, it will be added to your total income and will be taxed according to the tax slab you will fall into.

Avoid trying to be smart with the IT Department

In today's interconnected banking system, avoid the following, play safe and live a peaceful life:

1. Do not try to submit Form 15G/H just to avoid TDS. Giving a false declaration can be considered a very serious offence - which could even lead to jail up to 2 years. This information makes its way to the Form 26AS of the individual. One can only imagine what will happen to an investor whose Form 26AS indicates submission of Form 15G or 15H at multiple banks and an income that exceeds the basic exemption limit. In any case, even if you are able to avoid TDS by the bank, you are liable to calculate and pay the total tax while filing ITR. Playing such games is just not worth the effort.

2. Do not waste your time and energy splitting your bank FDs across multiple banks or branches. Every account is connected through your PAN number.

3. Avoid trying to save tax by investing in the name of your spouse or minor children. There is a clubbed income provision which leads to all the interest earned by your spouse or child to be clubbed with your income and taxed accordingly. In some cases, it might help investing in the name of your parents, because the clubbing provision does not apply there. However, just ensure that the parents income and tax liability should not go up because of that.

Having a clear understanding of Fixed Deposits and tax liability arising out of the interest income from the same will keep this investment option the way it was designed - simple, guaranteed, liquid, monitoring free and risk free. You will be able to enjoy its true charm then!

Visit my Official Website ( http://www.manoj-arora.com ) or my blog ( http://elevate-your-life.blogspot.com ) for more such articles.

Cheers

Manoj Arora

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Paying Inheritance Tax in the UK

The current UK inheritance tax is a debatable subject among the taxpayers. Most of us think that a person who paid all the taxes on the earnings in his or her lifetime than the government has no right to levy the tax on that money for a second time once the person has died. This is the reason that this type of tax is also known as "Double Tax" since the possession is taxed two times. Because of this double tax, there are many people who disapprove it and are submitting a petition against the inheritance tax so that the government may drop this tax. If someone is in a position of obtaining any inheritance, then that person must know that, what inheritance tax is and how it is paid.

The inheritor must verify whether the tax on the inheritance is liable under the Inheritance (Provision for Family and Dependants) Act 1975 and Inheritance Tax Act 1984. Inheritor is not required to pay the tax on such inheritance, which is left by the late spouse. Every person can pass on £325,000 before their heirs pay inheritance tax, which is 40% on anything above that amount. This is called the inheritance tax 'nil-rate band'. If you're married, you can inherit any unused allowance from your spouse or partner. That means that married couples and civil partners can pass on £650,000.

If the inheritor is liable, then know how much tax will be levied. Beneficiaries are required to pay the tax on their inheritance share. Estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold when a person die (or 36% if someone leave at least 10% to a charity). Dealing with it is one of the biggest thing you can do, as some simple actions can save you £100,000s.

How you can save paying huge amount of Inheritance Tax

Following is a simple and easy to understand guide to avoid inheritance tax:

First, choose the assets you want to be kept in trust. Mostly, Settlers decide to keep a small amount in the beginning and with time they continue to add more assets. However, you can also do a large contribution in the beginning as death can come any moment.

You must name your trustees. Trustees are those who decide the distribution of trust assets to the beneficiaries. In many jurisdictions, it is permitted to become trustee yourself but you will have to choose an independent trustee, one who is not from your extended and immediate family. If you fail to do so, the trust might be rejected by the court.

To avoid Inheritance tax you must hire trust solicitor who is well-experienced and can draft your deed of trust. This deed must state the name of the starting assets in trust, trustees, and beneficiaries. You must also clarify the roles and power of trustees; describe the rules for financial management, verify the decision making power of the trustees and verify the laws for the investment of the trusted assets. In the end, the deed must be notarised and signed to form the trust.

Start selling your own assets to the trust of your family over a period of years and slowly forgive your debts from the trust by using the notarised and signed papers.

Give something to friends or family members. A friend or a family member who is not your spouse or civil partner, so that you no longer get any benefit from it. It won't be taken into account when calculating the Inheritance Tax liability when you die.

Get expert advice on your inheritance and guidance in contesting a will, contact Going Legal Ltd today.

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