Oct 1, 2009

Answering Readers’ Questions (Part 1)

Photo by Travelin' Librarian

From time to time I’ll try to answer some of the questions asked to me by the readers. This is first part of the series.

Continuity of FD in case of Death of a Fixed Deposit Holder
This query regarding continuity of fixed deposits of banks in case of death of a person is asked by Dr. Sudheer Prabhu (email: sudheerdr2000atyahoo.com). Here’s the question:

I am the Nominee of a Fixed Deposit held by my mother who expired recently. It’s a long term FD and locked in at a good interest rate so I don’t want to close it now. When my Mom was alive she used to give a Form 15G so that no TDS is deducted. Now that she is no more I just wanted to know how the Interest portion would be taxed. It’s a 10 Year FD with interest cumulative and delivered on Maturity. My Query is

1.If I hold on to deposit which I would like to then how would the Interest portion be taxed as the Deposit is in the sole name of my Mother & I am the nominee who would receive the proceeds upon maturity?

2. At the time of maturity is the amount totally tax free in my hands?

3. How do I avoid TDS from being deducted or can I claim refund of TDS as my Mother has expired and there is no point in deducting TDS in her name. Can I claim refund of TDS by filing returns as representative assesse of my Mother?

4. If the Interest portion is taxable in hands of receiver /Nominee then can I show the Interest proceeds in My HUF account as the amount is not earned by me.

5. Can I show it in my HUF account though the deposit continues to be in my mother’s name, and I declare the interest as received by me purely for tax purposes?

6. Can I just leave the Deposit as it is for next 10 years and claim it upon maturity if I have not shown it now in my HUF returns or personal IT returns. Will there be problems later if it’s not shown now

7. Also my HUF account will not have my Mothers name in it as I opened the HUF account newly

8. Please answer all my Queries one by one in detail

It’s said TDS will continue till date of maturity if I hold on to the deposit. Can I claim a refund of the TDS by filing returns in the name of My late Mother`s behalf as anyways the income would have been non taxable in her hands

At Maturity My mothers account is not necessary as I am the nominee and the amount will be paid to me into my account.

The bank has been informed about the demise as soon as my mom passed away. Infact she by herself was a bank employee so they know very well about her demise. Bank has told me that I can hold on to the deposit till maturity that is 10 years. Just wanted to know how to avoid the TDS and the tax implications of interest earned. I know after maturity the amount is tax free in my hands. Just wanted to know whether I can claim refund of TDS every year for next ten years by filing returns in my mother’s name. That’s what one of the CA advised me. Please guide in this regard the tax implications.

I am sure I don’t want to close the deposit and even the Bank also does not ask me to do so.



Reply:
As per Banks fixed deposits terms and conditions:

“In the event of death of deposit holder in respect of which a nomination is in force, the nominee shall be entitled at any time before or after the maturity of the deposit to encash the deposit. For the aforesaid purpose the surviving nominee shall make an application to the branch manager of the bank supported by proof of death of the deposit holder.”

It implies that nominee can claim the deposit before / after the maturity as per his wish. It further implies that if the nominee continues the deposit, it will be continued in the name of deceased person and accordingly bank will continue to deduct TDS in the name of the deceased.

Accordingly, point-wise reply is as follows:

Q1. If I hold on to deposit which I would like to then how would the Interest portion be taxed as the Deposit is in the sole name of my Mother & I am the nominee who would receive the proceeds upon maturity?
Ans: The interest income (including interest accrued up to the date of her death) will be income of your mother and you’ll show it in the return of income you’re required to file on behalf of and as legal representative of your mother (u/s 159 of the IT Act). However, as pointed by you that your mother was submitting Form G, it implies that her total income was below the basic tax exemption limit applicable to women. So, there won’t be any requirement for you to file the return in the capacity of a legal representative (presuming her total income up to the date of her death is below the taxable limit).

Secondly, the interest income from the date of her death till the end of the accounting year/ maturity of the deposit will be your income (presuming she died intestate i.e., without leaving a will and you’re the only legal heir) and you’ll have to show it in your return of income in a similar manner as you show your own interest income.


Q2. At the time of maturity is the amount totally tax free in my hands?
Ans: No, the interest portion is taxable.


Q3. How do I avoid TDS from being deducted or can I claim refund of TDS as my Mother has expired and there is no point in deducting TDS in her name. Can I claim refund of TDS by filing returns as representative assesse of my Mother?
Ans: You can neither avoid TDS being deducted nor can claim refund of TDS. No, you can not claim refund of TDS by filing returns as representative assesse of your mother.


Q4. If the Interest portion is taxable in hands of receiver /nominee then can I show the Interest proceeds in My HUF account as the amount is not earned by me?
Ans: No, because it is not an ancestral property.


Q5. Can I show it in my HUF account though the deposit continues to be in my mother’s name, and I declare the interest as received by me purely for tax purposes?
Ans: No


Q6. Can I just leave the Deposit as it is for next 10 years and claim it upon maturity if I have not shown it now in my HUF returns or personal IT returns. Will there be problems later if it’s not shown now?
Ans: If you do it you will face difficulty in tax assessment because bank will deduct TDS in the name of your mother although it will be your income.


Q7. Also my HUF account will not have my Mothers name in it as I opened the HUF account newly
Ans: Incomplete question


Q8. Please answer all my Queries one by one in detail
Ans: Done


In my opinion, there are only two ways to resolve it:

1. If the bank is really interested in offering this facility of continuity of deposit, they should first endorse it in favour of nominee which I don’t think they’re going to do.

2. The only other alternative is to close the existing FD pertaining to the deceased and get a fresh FDR issued in favour of nominee / legal heir.


You can send your question to
feedback@themoneyquest.com.

Also see:

1. Investing in Bank FDs - Interesting Interest Calculation

2. PPF Calculator

3. Interest Income on Bank FDs - Tax Treatment

4 comments:

  1. Hi Mr. Fisher
    Between reading your blog and Value Research I'm getting all the investment advice I'll need!!

    Recently I was informed by HDFC Bank that I've been bestowed the status of "Preferred Customer". On inquiry, I was informed by my "Relationship Manager" that the online MF account charges and the demat account charges, both newly opened, will be waived because of this. Also, was informed to keep this info to myself and not share it with my colleagues. All this was told, of course, verbally by the "Relationship Manager". A week back I sent an email to my "Relationship Manager" requesting him to confirm all this by a return email. Its been a week and am awaiting a reply.
    Is this "Business as Usual" meaning normal practice of banks? Is there a catch (other than keeping me hooked) or am I looking a gift horse in the mouth?

    ReplyDelete
  2. Machax: Sorry, can’t say anything about it.

    ReplyDelete
  3. my father passed away recently he had a bank fd under the senior citizen scheme.there was no nomination.i am the nominee for his s.b.a/c in the same bank. we are three brothers all major.what happens?

    ReplyDelete
  4. If there is no nomination (SB a/c nomination is not valid for a FD), bank will hand over the FD proceeds to legal heirs.

    As per RBI guidelines, up to a minimum threshold limit (to be fixed by each bank), a letter of indemnity could be accepted for settling the claims in respect of deceased depositor. For amount above the threshold limit bank may insist on production of succession certificate / probate.

    ReplyDelete

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