Don't ignore tax concerns and possible legal hassles before opting for these
How choosing between 'either or survivor' and 'former or survivor' options of operating the account should matter.
But it does, because it can create legal hassles in case of death of the account holder. A lawyer dealing with estate planning, she encounters several cases where legal heirs have not been able to make a claim to the balance of the bank account, since the bank has been mandated otherwise.
Banks follow the mandate signed by the primary account holder in a joint account. If the 'either or survivor' mode is chosen, on death of any one of the account holders, the surviving one alone can operate. He/she will be entitled to the balance in the account.
The legal heirs of the deceased account holder cannot make any claim against the bank until the death of the surviving account holder. The bank would stop the survivor from operating the account, only if the legal heir produces a court order that restrains the bank to do so.
If one chooses the 'former or survivor' option, the survivor can operate the account only on death of the first account holder. This again creates complications and does not really serve the purpose, if one is looking for the conveniences of a joint account.
The mode of operation for a joint account has to be specified at the time of opening the account and cannot be changed without a written consent of all joint account holders.
The account holder or all joint account holders should nominate a person to whom, in the event of the death of the sole or all account holders, the amount of deposit may be returned by the bank. The nominee holds the money received in trust for the legal heir of the deceased account holder.
TAXATION
If the account is linked to a fixed deposit offered by the bank and interest earned on it is more than 10,000 annually, the bank will deduct the tax deducted at source in the name of the primary account holder.
In terms of attracting a tax liability, opening a joint account with relatives, especially those with no independent income, poses the least risk. Withdrawals up to any amount, by the relative in effect, would be considered as a gift to the relative according to the Income Tax (I-T) Act. Since gift to relatives is tax-free, there would be no income tax on the recipient.
However, if the money is withdrawn and invested by the joint account holder who is a spouse (according to the I-T Act, spouse is also a relative), the clubbing provision would apply. Any income that has been generated by such an investment made by the spouse would have to be included in the income of the primary holder. He/she would pay taxes as applicable under the tax slab he/she falls.
Even for joint holdings between non-relatives, there would be no tax applicable on withdrawals of up to `50,000 under Section 56 of the I-T Act. However, anything above this will be taxed in the hands of the recipient.
LIABILITIES
A fear regarding opening a joint account is that it would expose one partner of the joint account to tax liabilities of the other.
Income tax officials look at the source of the funds for determining taxes and so, as long as the person can explain his/her part of the income, he/she would have to pay taxes on that part only. His advice: If both individuals are liable to pay taxes on their individual incomes, they should opt for opening two separate joint accounts and, thereby, maintaining clarity in their sources of funds. So, for instance, the husband could be the primary account holder in one and his wife could be the second holder. It could be vice versa in another account.
The mode of operation determines who will have access to the account
Nominee holds funds for the legal heir, in case of death of both account holders
Withdrawal by relatives, in a joint account, is considered as a gift to them
Clarity of source of income needed for tax purposes