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Is Fixed Deposit Interest Of Minors Taxable?

Monday, February 14, 2011

Anand Tibrewala
is a CA and Senior Partner at the leading Chartered Accountancy firm, AD & Company

I have two children who are minors. They have been receiving gifts from relatives and friends on various occasions. These gifts were accumulated in their respective bank accounts. Recently we have shifted the money to Fixed Deposit. Please advice what is the tax treatment of the FD interest. Secondly, my wife also works for a MNC and has an independent income from her employment. In fact she earns more than me. Whether this would impact the taxation?
    — R.P.Sharma, Khar Road

The FD interest is certainly taxable in the hands of the parents. The parent who is having higher income would need to include the interest earned on children FD in his/her return. As mentioned by you since your wife has higher income she needs to declare the FD interest in her return. She can claim deduction of Rs. 1,500/- in respect of each minor child income in her tax return.

I am partner in one firm along with my spouse. Both of us are drawing remuneration from the firm. Please advice whether it is as per income tax law?
    — Vincent.Phillips, Grant Road

As provided under section 64 (1) (ii) remuneration can not be drawn by both i.e. husband and wife. If it is drawn, then it would be clubbed in the hands of the spouse who is having higher income. If the firm is engaged in technical or professional activities and both the spouse are academically qualified to carry out such activities then clubbing provisions would not apply and both the spouses can enjoy remuneration from the same firm.

I have invested in National Saving Scheme from time to time to avail tax deduction. The interest is cumulative in the scheme. Whether the accumulated interest is to be offered for taxation every year or can it be offered at the time of maturity?
    — Sunil.Parab, Thane

The interest on National Saving Certificates is taxable. However, the mode of taxation would depend on your accounting method. If you are following accrual system of accounting then you need to offer interest every year on accrual basis. If you are following cash system of accounting then interest can be offered at the time of maturity. I would advice that if it is offered every year then you do not carry forward the burden to the last year. Secondly the accrued interest is treated as fresh investment and qualifies for tax deduction under section 80-C provided it is offered for taxation. You do not enjoy this benefit if interest is offered on maturity since interest is paid out in cash.

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