Inheriting fixed deposits (FDs) after the death of a parent can bring about a range of emotions, from sorrow over the loss of a loved one to relief from the financial security provided by the inheritance. However, along with this financial asset come responsibilities, especially in terms of understanding and managing the tax implications attached to it. It is crucial for beneficiaries to be aware of the various tax rules that apply to inherited fixed deposits in India, as failing to do so may lead to unintended financial consequences.

What Happens to Fixed Deposits After a Parent’s Death?

When a parent, such as a father, passes away, the ownership of their assets, including fixed deposits, is transferred to the legal heirs. If the FD account was held jointly, with the heir named as a co-holder, the situation is relatively straightforward; the surviving account holder can continue operating the FD as per the original terms, and the interest earned on the FD will be taxable in their hands going forward.

If the FD was held solely by the deceased parent, the legal heir(s) must go through a formal process to claim ownership of the fixed deposit. This process typically involves submitting documents such as the death certificate, the will (if available), and a proof of heirship to the bank or financial institution where the FD is held. In the absence of a will, the legal heirs must submit a succession certificate or a letter of administration.

Once the documentation is verified, the bank will transfer the FD into the name of the legal heir(s), at which point they become responsible for managing the FD and paying taxes on the interest income it generates.

Tax Implications on Inherited Fixed Deposits

One of the common misconceptions surrounding inheritance in India is that the act of receiving the asset itself is taxable. However, as of now, India does not impose an inheritance tax or estate duty. Therefore, when a person inherits a fixed deposit, they are not required to pay any tax on the principal amount they receive. This can provide significant relief to heirs who are concerned about immediate financial obligations.

That said, the interest earned on the inherited fixed deposit is a different matter. Fixed deposits are essentially a form of investment that earns interest over time, and any income derived from interest is taxable under Indian income tax laws. The responsibility for paying taxes on the interest income from the FD falls on the person who inherits it.

How is Interest Income from Inherited FDs Taxed?

Once an FD is transferred to the legal heir, any interest that accrues on it from the date of inheritance is taxable in the hands of the heir. The interest income is added to the heir’s total income for that financial year and taxed as per the applicable income tax slab rates. This means that if the beneficiary falls into a higher tax bracket, the tax liability on the interest income will be higher.

For instance, if you are in the 20% or 30% tax bracket, the interest income from the FD will be taxed at those rates. It’s also important to note that banks usually deduct Tax Deducted at Source (TDS) on FD interest if the interest exceeds Rs. 40,000 in a financial year (or Rs. 50,000 for senior citizens). The legal heir will still be required to include the interest income in their total income when filing their tax returns, and they can claim credit for the TDS deducted by the bank.

Taxation Before the Inheritance Transfer

It is worth noting that if the FD earned interest before the death of the parent, the interest earned up to the date of death is taxable in the hands of the deceased parent’s estate. The legal heir is not responsible for the tax on any interest accrued before the date of transfer. This responsibility lies with the executor of the deceased’s estate, and they must ensure that all outstanding taxes are settled before transferring the FD to the heir.

Special Considerations for Senior Citizens

In India, senior citizens (those aged 60 and above) are offered several tax benefits. If your deceased parent was a senior citizen, and the FD earned interest during their lifetime, they would have been eligible for a higher exemption limit on interest income. Under current tax laws, senior citizens can claim an exemption on interest income up to Rs. 50,000 from bank FDs under Section 80TTB of the Income Tax Act. However, once the FD is transferred to the legal heir, the tax benefits available to senior citizens no longer apply, and the interest income will be taxed based on the heir’s income slab.

Nomination and Succession Planning

To avoid legal hassles in transferring assets after death, many individuals choose to nominate a person to inherit their assets, including fixed deposits. A nomination ensures that the bank will transfer the FD directly to the nominee without any need for a will or a succession certificate. However, it is important to note that a nominee is only a trustee of the asset. If there are other legal heirs, they may have a right to claim a share of the FD, even if a nominee is named.

In the absence of a nomination or a will, the process of claiming an FD becomes more complicated, as legal heirs must prove their entitlement through a succession certificate. This can be a time-consuming process, and it is advisable to plan succession and nominate heirs to avoid these issues.

Managing the Inherited Fixed Deposit

Once you have inherited the FD, you have the option to either continue with the fixed deposit until it matures or withdraw the amount. If you choose to continue with the FD, you will need to decide how to handle the interest income, as it will be taxable in your hands. If the FD is earning a high rate of interest and you are in a higher tax bracket, it might make sense to withdraw the FD and invest the proceeds in a tax-efficient investment vehicle such as debt mutual funds or Public Provident Fund (PPF), depending on your risk profile and financial goals.

Additionally, keeping track of the TDS deducted by the bank is essential. Ensure that the TDS is reflected in your Form 26AS, and claim credit for it while filing your tax returns. If the total interest earned is below the taxable threshold, you can submit Form 15G/15H (for senior citizens) to the bank to avoid TDS deduction.

Conclusion

Inheriting fixed deposits after a parent’s death provides a financial cushion, but it also brings tax responsibilities. While there is no inheritance tax in India, the interest earned on the FD is taxable in the hands of the legal heir. Proper documentation, nomination, and succession planning can ease the process of claiming the FD, and understanding the tax implications will help you manage the inherited asset efficiently. It’s always wise to consult a financial advisor or tax expert to ensure that you comply with tax laws and make informed decisions regarding your inheritance.