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Like many other things, the way you want to manage your finances and assets also changes after marriage. One of the important aspects of this is to have joint accounts. There are many questions around taxations, advantages and short comings of holding bank accounts or other assets jointly. Understanding how one can use this feature brings in a lot of convenience not only in day to day operations but also in transfer of rights or estate planning.
Joint holding simply means 1st holder also wants to involve other multiple holders to a particular asset class. There are several types of joint holding accounts in general most common and favourable type of joint holding account is “Anyone or Survivor”. This essentially means any of the holders can operate or transact on behalf of the first holder and in case of the death of the 1st holder, the survivor which is the 2nd holder becomes the owner of the asset. So specifically look for the option of “Anyone or Survivor” and if opting for any other option, understand all the features.
2 very important rules for ease of operation and clarity in taxation
- Most of the assets and investments can be held jointly. But most importantly the holding status has to be declared at the start of the investments. Bank account is the only area where a joint holder can be added while the account is already in operation. In all other cases investments have to be liquidated and then reinvested in joint name. One therefore needs to plan well before making any new investment.
- Second most important aspect is even if you have joint account DON’T pool in money of all the holders. If both the spouses are earning it better to open two joint accounts where in one account husband is the 1st holder and wife is the 2nd holder and vice a versa in the other account. It is very important to treat 1st holder the absolute owner and do the transactions accordingly. Taking care of this will take care of all the tax ambiguity. (Explained below in detail)
- Convenience of transactions – Day to day operations becomes very convenient if accounts are jointly held. A housewife does not need to wait for the husband to sign on cheques for payment of utility bills. Parents can also become joint holders and may facilitate transactions. In case the first holder is travelling the second holder can facilitate the transaction by drawing and signing the cheque. Also in case of emergency where the first holder is hospitalized the second holder can transact by redeeming any asset or withdrawing cash from the bank account.
- Easy transfer / Estate Planning – This probably is the most significant advantage of a joint account. Even if one does not have a Will, the rights of the assets are transferred to the 2nd In fact the rights of the second holder, supersedes the Will if any. This not only ascertains the quick transfer but also leaves no place for ambiguity. In case of nomination the nominee has to go through all the paper work and then has to compulsorily redeem the investment in his/her name. In case of joint holding the asset is available for transaction as and when required and after proper documentation the same would be transferred making second holder the absolute owner. So the family saves a lot of time not waiting for the death certificates and other formalities during this crucial period. (Remember to choose “anyone or survivor” option as mentioned above)
- Privacy is compromised – This is the other side of the convenience coin. 2nd holder may have access to all the transactions and asset values. This not only requires one to have immense trust on the second holder but also will lead to compromise in privacy. Questions may be asked about regular withdrawals or expenses made. It would be also impossible to buy a costly gift if you want to do so to surprise your spouse.
- Increase in tax liability due to clubbing of income – This is one area which needs to be understood very clearly and needs to be read with the second golden rule mentioned above. As per provisions of income tax, 1st holder may have to pay tax on the income of second holder if the same is deposited in the joint account. For eg If some interest is received on the fixed deposit made by 2nd holder and is deposited in the joint account, then 1st holder might have to pay tax on that interest income even if the 2nd holder has no other income and tax liability. Basically the income is clubbed and if 1st holder is in higher tax bracket as compared to the second holder, he/she would be liable to pay the tax.
It can clearly be understood that having a joint account is of great advantage and the minor shortcomings can be dealt with small bit of planning and discipline.