Is TDS Applicable on Interest Paid to Legal Heir ?

Every legal heir whose father or mother had term deposits in Bank may ask whether  TDS is applicable on interest, because bank informs them about impending TDS on  payments of interest on fixed deposits or term deposits which are  in name of person who dies suddenly or unexpectedly.The ther question which arises , generally in midn of legal heirs is if TDS applicable on interest , whether form 15 G can be filed by them to prevent TDS on such interest payments. Earlier , on this blog a posting regarding the eligibility of filing Form 15G by legal representative of the deceased was made , but it is felt that the issue should be covered in detail as one reader- Sri G. Malviya of Lucknow  has asked very relevant question in this regard.

He asks : “My father was having Fixed Deposits in Bank. He died. After his death the Maturity Amount (Principal + Interest) is being paid to me as per Nomination. Now Bank is deducting TDS on Interest. My queries are :-

1. Can Bank Deduct TDS on Interest earned and being paid to me?
2. If TDS is deducted than TDS Certificate should be in whose name i.e. my father or me?
3. My Gross Income including from my all sources Plus Interest Income from Father’s Fixed Deposits will be below the Taxable limit. In the circumstances can I submit Form 15G for not deducting TDS on Interest Income? If not then–
4. Can I submit 15G on my behalf of my deceased father?

The answer to the question is being done in manner that all the readers can get benefit out of it. The first thing to ponder over the taxation of income of deceased , then the rules regarding filing of return of income, then comes the rule regarding the TDS on interest payments on term deposit of fixed deposits .

Is the interest received by legal heir taxable in his hand or in his capacity as legal representative?

If the asset ( principal amount has legally beein transferred to the name f legal heir , any income arising out of such asset which is  , by virtue of law,  now the asset of the legal heir , is taxable in his hand as his income. If the assets of deceased person has not become the asset of his/her heirs by law, till that time income on those assets has to be assessed in the name of his legal representative.

For example , if there are more than one legal heir and on expiry of the person , the Fixed deposits are not divided among the legal heirs, in that case the interest earned on the fixed deposit or term deposit , should be assesseed in hand f legal representative . After the division of the property , the asset is the property of respective legal heir , and any income earned on such asset is to be assessed in his individual capacity only.

Who can be legal representative  for Income Tax Act purpose?

Any one among legal heirs can be authorized to act as legal representative for the purpose of I T Act. Get signature of all legal heir on a non judicial stamp paper wherein it is declared that Mr X or Mrs X will act as legal representative of deceased person.

In whose name the return should be filed?

The return of income should be filed as if the deceased person is alive . The name of the deceased assessee should be used  and under which you can put name of legal representative.

Is TDS required on interest n fixed deposit or term deposit?

Under the law , the bank is required to deduct the tax u/s 194A at the time of credit or payment of interest. At that moment , it does not matter if the payee has actually died or if the payment is being done to legal heir.

In fact , even in case of Senior Citizen Savings Scheme it has been made rule through CBDT circular   F.No. 2/8/2004/NS-II, dated 6-6-2006.    that TDS should be deducted on undrawn interest payment  to legal heir of a deceased subscriber to   the Senior Citizens Savings Scheme, 2004.

So, it is for sure that TDS is deductible if the payment of interest is more than Rs 10,000 .

Can legal heir or nominee file 15 G ?

Definitely he can file the form 15 G if the condition for filing 15 G is being fulfilled. It must be pointed out that 15 G can be filed by any payee as per the section 197A of Income Tax Act . Since , the legal heir is only acting on behalf of the payee whoo  has died , the right to file Form 15 G is not abolished.

The matter will be clear from the  Central Board of Direct Taxes  Office Memorandum F. No. 275/36/2009-IT(B), dated May 14, 2009, by which it had been clarified that  nominee of the investors of SCSS can also produce 15G Form (declaration of non-deduction of tax from the amount of interest payable) at the time of payment after the death of the depositor.

Is there any other way to prevent TDS ?

Yes, legal heir should approach the TDS wing officer and pray in writing for issue of a non deduction certificate . For this , it is better, the family member approach the Commissioner or Add.CIT ( TDS ) and pray in writing and by meeting them , telling them of the problem they are facing on account of death of the payee. For making application for no deduction of tax certificate , there is lower deduction  prescribed Form no 13.

What if the Bank make TDS despite your best effort ?

You will have to file income tax return in name of deceased person and sign the return as legal representative and claim refund by giving your bank account number in return of income.