My mother passed away. And I am nominee of her FDs. What are income tax rules?

My mother has pass away and had Fixed Deposits. We are one bother and sister as her legal heirs. All FDs were in my mother name and I am the nominee. My mother has not made any Will. I wish to transfer the FD to my sister for her child's education. I checked with banks, where these FDs are booked and they said, we can only close these FDs and transfer the money to my account, as I am the nominee. I can then transfer the money to my sister, if I wish to do so.

My questions are :-

1) Will I get any notice or have to pay any tax once these are credited into my account?

2) How would my sister show this for ITR purpose, once I transfer these FDs into her account after the amount is credited into my account.

My mother was a tax payer and so I am I. My sister is housewife and does not file ITR. However, she holds a PAN card, and now will file ITR, as these FDs she will reinvest and earn interest income.

Role of a nominee is that of a trustee of the legal heirs of the deceased and not as owner of the assets received as a nominee. Yes, the banks are right in their stand that the money can only be credited to your bank account as you are the nominee and by crediting the money to your account the banks are discharged of their liability. Since you and your sister both are legal heirs and strictly speaking both of you are entitled to equal share in the asset of your late mother. However, the legal heirs amongst themselves can agree for unequal share or even agree a single heir to get all the assets to the exclusion of other legal heirs.

So you can either let your sister have the entire money as inheritance or you can first share it equally between both of you and then gift your share in the bank deposits to your sister. Since there is no inheritance tax in India, the inheritance received by both of you is not to be treated as your income. If you gift your share in the bank deposits to your sister this will also not to be treated as her income as gifts received from specified relative including siblings are not to be treated as income. 

Whether you let your sister have whole of the proceeds of the bank fixed deposits as inheritance or give half of the share as her share in inheritance and half as gift from you, both transaction will not have any tax implication either for you or for your sister.

Since inheritance as well as gifts from specified relatives are not treated as income, your sister is not required to disclose the same in her ITR. If she wishes, she can still show the money in schedule EI (Exempt Income) of the ITR.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter