Have a joint account with a spouse or parent? Do this to avoid tax trouble.

Mr. A holds a joint bank account with his non-working spouse, who is the primary holder. Though Mr. A deposits the funds, the bank may still report the interest income in the spouse’s name, since most banks levy tax deducted at source (TDS) in the name of the first holder, irrespective of who contributed to the funds.

To the earner goes the bill

“This often tempts working spouses to shift income to non-working partners, whose taxable income may fall below the threshold. But legally, the income is taxable in the hands of the earner,” said chartered accountant Prakash Hegde.

He cautioned that such mismatches should be corrected. “The I-T department can question you if large sums are involved, because the principle of taxation is simple: income must be taxed in the hands of the person who earns it,” he said.

If one account holder does not work, it is best to tell the bank upfront to deduct TDS against the earning holder’s PAN. “There is a specific provision under the I-T rules which allows a non-earning spouse to declare to the bank that the income belongs to the husband. In such cases, TDS should be issued in his name since he will pay tax on it,” Hegde added. If both holders work and contribute funds, each should pay tax in proportion to their contribution, he added.

Double reporting of TDS

Take another case, in which Mr. A and his son hold a joint account. Mr. A opens a fixed deposit (FD) and earns interest, but the interest reflects in his son’s Annual Information Statement (AIS) as well, even though he was not the depositor.

Though rare, such cases occur when interest income is tagged to both holders. “Here, they must prove the source of the FD was the father’s income, not the son’s. The son should also use the ‘feedback’ option in AIS to mark the entry as ‘not fully correct – income not taxable in my hands’ to rectify the error,” said chartered accountant Ashish Karundia.

Clubbing provisions

What if a working spouse gifts money to a non-working spouse? Say Mr. A transfers money to Mrs. B’s individual account, which she shifts to their joint account to open an FD. Who pays tax on the FD interest? Here, clubbing provisions apply and the tax liability falls on Mr. A.

“Clubbing applies between spouses, minor children, daughters-in-law, and HUFs (Hindu Undivided Families),” said Hegde. “If Mr. A had a joint account with his brother instead, the brother would be taxed on his FD income, since clubbing doesn’t apply between siblings.”

Ultimately, joint accounts can be useful but require some work to maintain. “Keep clear records of contributions if both holders are depositing funds. If a name has been added purely for convenience, inform the bank so that income is reported only in the name of the true earner,” Karundia said.