Losing a parent can be an emotionally difficult experience, and managing their financial affairs can add to the challenges faced by family members. Along with handling inheritance and bank formalities, legal heirs may also need to ensure that the deceased person’s income tax obligations are properly addressed.
One common question concerns fixed deposits (FDs) held in a parent’s name. Although money inherited from a parent is generally not taxable in India, the interest earned on the deposit may attract income tax.
The person responsible for reporting the interest depends on when it was earned and who is legally entitled to the deposit. Understanding this distinction can help family members manage the deceased parent’s final income tax return (ITR) and meet their own tax obligations.
Who Pays Tax on FD Interest Before and After Death?
Nishant Shanker, Tax Controversy and Dispute Resolution at Navraj Global Advisors, explained that the tax treatment of fixed deposit interest depends on the period in which it accrues and the ownership of the deposit.
According to Shanker, interest earned up to the date of a parent’s death is generally taxable as the deceased parent’s income. The legal representative is responsible for filing the relevant income tax return on the deceased person’s behalf, where required.
Interest accruing after death is generally taxable in the hands of the person legally entitled to receive it through inheritance. The applicable treatment depends on the ownership of the FD and the circumstances of the inheritance.
If the deposit remains in the deceased parent’s name while the bank processes the claim, the legal heir should maintain proper records and ensure that the interest is reported correctly.
The key distinction is that inheriting the principal amount is generally not taxable, but the interest subsequently earned on that amount may be taxable.
How Is FD Interest Taxed? An Example
Consider a situation in which a person loses a parent in August. If the parent’s fixed deposit earned interest up to the date of death, that interest would generally be treated as the parent’s income and reported accordingly through the legal representative, where required.
Interest accruing after the parent’s death must be considered separately. Its tax treatment depends on who becomes legally entitled to the deposit and the applicable tax rules.
Therefore, family members should not automatically report all the interest under a single person’s income without first establishing the relevant periods and ownership rights.
What If the Fixed Deposit Remains in the Parent’s Name?
Sometimes, a fixed deposit continues to be held in the deceased parent’s name while the bank completes the settlement process. This can also happen when the family needs to establish the legal heirs or resolve inheritance formalities.
In such cases, the family should take a few practical steps to keep the financial and tax records in order.
First, obtain the bank’s interest certificate to identify the interest earned during the relevant period. Keep the parent’s death certificate, FD documents and other necessary succession or inheritance records readily available.
The legal heirs should also establish who is entitled to the deposit and how the principal and interest are to be allocated among the beneficiaries. If there is no will, the applicable succession rules and the bank’s claim process may need to be considered.
Once ownership and the interest amounts have been established, the relevant taxpayers should ensure that the income is reported in accordance with the tax rules applicable to the circumstances.
Key Points Legal Heirs Should Remember
The principal amount received through inheritance is generally not taxable in India, but interest earned on an inherited fixed deposit does not automatically receive the same treatment.
Legal heirs should identify the interest attributable to the period before the parent’s death, determine who is entitled to interest earned afterwards and ensure that the deceased parent’s final ITR is handled where required.
Maintaining accurate bank statements, interest certificates and inheritance documents can help prevent confusion and potential tax complications later.
Disclaimer: This article is intended for general informational purposes only and does not constitute tax or legal advice. The tax treatment of FD interest depends on the facts of each case, legal ownership, applicable succession rules and the tax laws in force. Readers should consult a qualified tax professional or legal adviser for guidance on their individual circumstances.
