Bank FDs for children: How interest income will be taxed

My son is 3 years old. I intend to make a 15 years cumulative fixed deposit in my son’s name to create a corpus for him, which he will get when he turns 18. Am I supposed to pay tax on interest accrued on that fixed deposit every year? 

A tax payer has option to offer his income for tax either on cash basis or on accrual basis for two heads of income i.e. “Profits and gains of business or profession” and “Income from other sources”. Interest on bank deposits is generally taxable under the head “Income from other Sources.”  

Since the fixed deposit is being made in the name of your minor son, the income earned during the minority will get clubbed with your income till he becomes a major if the income is offered on accrual basis. But in case you are following cash basis for interest income, the interest will be added to the income of your child at the time of maturity of the fixed deposit when he would have become major. Please note that the method once adopted has to be followed consistently year after year.

In order to ensure that the interest for full 15 years becomes taxable in the hands of your child at the time of maturity, the original tenure of the fixed deposit should be 15 years so as to ensure that it matures when he becomes a major. In case the tenure is less than this period and the fixed deposit is renewed even automatically during the period of your son’s minority, the interest component on such renewed fixed deposit should be added to your income as the interest is deemed to have been received by you on the renewal of the fixed deposit though not actually credited to your account. Since the interest for full 15 years will be taxed at once, you need to evaluate the option of offering the income on accrual basis to minimise the overall tax liability.

Balwant Jain is a tax and investment expert and can be reached on [email protected] [email protected] on Twitter

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