While most people prefer joint holding of investments for convenience in succession planning, it can trigger duplicate reporting to the income tax department. Non-earning joint holders, particularly homemakers and senior citizens, are receiving notices for transactions they never initiated or funded.
Banks, mutual funds, and other financial institutions are required to report specified financial transactions (SFTs) such as high-value deposits (above Rs 10 lakh) or mutual fund purchases, under the PAN of each joint holder, regardless of who actually funded the investment.
Mismatch in AIS
This duplication creates a mismatch between the actual income reported in tax returns and the information reflected in Annual Information Statement (AIS), leading to increased chances of automated tax notices or verification queries being issued. The enhanced scrutiny has intensified due to technological advancements in tax administration systems. The implementation of Rule 114E(2) has created a systematic issue where high-value transactions are automatically flagged across all joint holders’ profiles.
Despite submitting feedback on AIS clarifying their non-involvement, responses are often rejected by reporting entities citing mandatory compliance with Rule 114E(2). As more categories like high-value deposits, mutual fund purchases, securities transactions, and credit card payments are sent to AIS, joint names can raise questions unless records and AIS feedback are proactively used to explain real ownership.
“Joint investments often lead to tax notices and duplicate entries in the AIS because of the reporting requirements prescribed under Rule 114E(2),” says Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm.
How to deal with a notice
Joint holders of investments may receive tax notices under Section 148A (reassessment) or Section 133(6) (e-verification) due to transactions appearing in their AIS that they did not actually fund. The assessee must carefully review the transactions reflected in their AIS and tax information system (TIS).
If any transaction does not pertain to them — in the case of joint holdings where the income belongs to the first owner — they should provide feedback in the AIS that the transaction belongs to another PAN.
To respond to the tax notice, the assessee should provide a clear funding trail such as bank statements, payment proofs, fixed deposit receipts, and declarations of beneficial ownership. This will help the department to match the income to the owner, while ensuring the correct return reflects the income and corresponding TDS credits.
In case an assessee discovers any omission/error after filing the original return, assessee can still file the revised return/updated return to correct the omission/error or update inaccurate information in accordance with the provisions contained in Section 139 of the Income-Tax Act.
Better to make a nominee
Appointing a nominee could help avoid unnecessary tax queries. As the nominee’s PAN does not appear on the investment folio during the primary holder’s lifetime, there is no SFT reporting requirement. Nomination reduces day-to-day reporting while joint holding may require consistent documentation and AIS feedback to prevent any forthcoming issues. “Unlike a joint owner, a nominee does not become a joint owner and thus avoids triggering tax queries based on reporting in the SFT,” says Itesh Dodhi, director, Nangia & Co LLP.
Choosing between sole ownership with a nominee and joint holding depends on the succession needs.
A nominee, unlike a joint owner, does not co-own the deposits or assets. The nominee merely acts as a trustee of such assets. Thus, to ensure smooth succession and avoid family disputes, nominations should be supported by a will or other estate planning measures.