Tax liability before the date of death When a fixed deposit (FD) holder passes away, the interest that has accrued **up to the date of death** is treated as part of the deceased’s income for that financial year. The amount must be reported in the **final income‑tax return** filed on behalf of the deceased. The legal heir or executor is responsible for filing this return and ensuring that any tax deducted at source (TDS) by the bank is reflected correctly.
Tax liability after the date of death After the FD is transferred to a legal heir, any interest that accrues **post‑death** belongs to the heir. Consequently, that interest is taxable in the heir’s own income‑tax return under the head **"Income from Other Sources"**. The heir must include the interest earned during the period they hold the FD in their annual return.
Filing obligations for the heir 1. **Final return of the deceased** – The heir (or the appointed executor) must file the deceased’s return for the year in which the death occurred, reporting all income earned up to the date of death, including FD interest. 2. **Heir’s own return** – The heir must report any interest earned on the inherited FD after the transfer in their own return for the relevant assessment year. 3. **TDS credit** – If the bank has deducted tax on the interest, the heir can claim the TDS amount as a credit either in the deceased’s final return (if deducted before death) or in their own return (if deducted after death).
Avoiding reporting errors Incorrectly attributing post‑death interest to the deceased can lead to a mismatch between the TDS certificates and the income reported, potentially triggering notices from the tax department. Careful segregation of interest earned before and after the date of death, along with proper documentation of the FD transfer, helps prevent such issues.
Legal heir responsibilities The legal heir is not only responsible for the tax on post‑death interest but also for ensuring that the FD is transferred in compliance with the bank’s KYC requirements. Once the transfer is complete, the bank will credit interest to the heir’s account, and the tax liability follows accordingly.
Summary of steps for heirs - Obtain the death certificate and the FD account details. - File the deceased’s final return, including interest earned up to the death date. - Complete the FD transfer formalities with the bank. - Report post‑death interest in the heir’s own return. - Claim any TDS credit shown on Form 26AS.
Practical tip Maintain a clear record of interest statements before and after the date of death. This documentation simplifies the filing process and provides evidence if the tax department requests clarification.
--- *This article is based on Indian income‑tax provisions governing interest income from fixed deposits and the responsibilities of legal heirs after a depositor’s death.*