Introduction

Maintaining a joint account is a common practice for families and co-living individuals. However, the tax implications of the interest earned on these accounts can sometimes be confusing. This article demystifies the tax rules and clarifies how to handle interest in a joint account, providing guidance based on U.S. tax laws and FD interest.

Understanding Joint Accounts and Tax Liability

When it comes to determining who pays tax on interest in a joint account, the IRS (Internal Revenue Service) suggests following local laws and considering the ownership of the funds. For instance, if the account includes a child's money and the parent is also listed, the interest could be considered the child's income. Generally, a 50-50 split is reasonable for other circumstances.

Tax Reporting: Local and Federal Regulations

According to current U.S. tax regulations, low interest rates on bank savings or checking accounts typically mean no tax reporting is required if the interest for the year is below $10. For joint accounts, if the couple is married and files jointly, the interest is income for both individuals and they both pay tax accordingly. If the account belongs to two unmarried individuals (e.g., parents and children), the primary account holder (often the mother) claims the interest.

The IRS requires that the interest income be reported on the IRS Form 1040 and the 1099-INT. The Bank determines who receives the 1099-INT based on the information you provide to them. If you are married and file jointly, it is not typically an issue, as the interest income and tax liability are shared between both spouses.

Fixed Deposit (FD) Interest and TDS (Tax Deduction at Source)

In the context of Fixed Deposits (FD), tax laws in India require that interest exceeding Rs. 40,000 for individuals below 60 years and Rs. 50,000 for senior citizens above 60 years in a financial year is subject to tax deduction at source (TDS). In a joint FD, there is a primary account holder and secondary account holders. TDS is deducted in the name of the primary account holder, but the secondary account holders are not subject to TDS.

Using online FD calculators, individuals can easily estimate the returns and any applicable tax deductions. Even during economic slowdowns, individuals can earn attractive interest rates, such as up to 7.35% with Bajaj Finance FDs, making it an appealing option for savings.

Navigating Primary and Secondary Account Holders

In a joint account, the primary account holder plays a crucial role in tax matters. The bank must be informed about the primary and secondary holders to ensure accurate identification. For FDs from the same bank, if the interest earned exceeds Rs. 10,000 annually, TDS is deducted in the name of the primary account holder. Secondary account holders do not face any TDS deductions but are collectively responsible for the tax liabilities.

Understanding these tax implications is essential for proper financial management and compliance with tax laws. While the rules can be complex, they are designed to ensure fair and transparent handling of income and tax liabilities.