Fixed deposits (FDs) are one of the most popular investment options in India, because of their guaranteed maturity value, ease of investing without any opening a demat account and easy access to banks.

Fixed deposits (FDs) are one of the most popular investment options in India, because of their guaranteed maturity value, ease of investing without any opening a demat account and easy access to banks. Moreover, very few retail investors want to take market risks and invest in equities, while most are risk-averse and prefer fixed-maturity investments, irrespective of overall returns in the long run.

However, a major drawback of FD investment is that the interest is fully taxable and banks even deduct taxes at source (TDS) on FD interest once it crosses Rs 10,000 in a financial year, unless Form 15G or 15H (for senior citizens) is submitted by the assessee to the banker for nil deduction or lower deduction of TDS on interest on fixed deposit. Once an investor submits his/her Form 15G or 15G, depending on the age, he or she will become liable to file income tax return (ITR) for the year.

To avoid the hassles of submitting Form 15G or 15H and file ITR, may people make FDs in the name of non-earning spouse, whose earning doesn’t become taxable on getting interests on the FDs. Although, there is no income tax bar on paying money to the spouse, but there is a catch when the money is invested generating returns or incomes.

As per section 64(1)(iv) of the Income Tax Act, if an individual transfers (directly or indirectly) his/her asset (other than house property) to his or her spouse otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor). So, if you invest in FDs in the name of your non-earning spouse, the interest earned will be added to your taxable income. Even if you transfer your bonds or debentures in your spouse’s name, the interests earned will be added to your taxable income.

Moreover, if your spouse breaks the FD and invests the money in some other instrument or invests the money gifted by you in FDs, the return generated by that instrument will also be added to your taxable income as the clubbing provisions of section 64(1)(iv) will apply even if the form of asset is changed by the transferee-spouse.

Even the income from transfer of house property without adequate consideration will attract clubbing provisions. However, in such a case clubbing will be done as per section 27 and not under section 64(1)(iv).

So, you can’t reduce your tax liability on FD interest by investing in your spouse’s FD account.