Recurring Deposits have been a popular savings tool among Indian investors for many reasons. On the one hand, they help slowly but steadily grow your capital, and on the other hand, they help create financial discipline. In all these, what one mustn’t forget is the tax liability. Not knowing the tax obligations when RDs are taxable under the Income Tax Act will lead to misunderstandings and surprises at the end of the maturity period.
On that note, let’s explore the tax implications of recurring deposits in detail!
Is Interest on RDs Taxable?
Yes, the interest generated by an RD is taxable. The amount you put into an RD every month goes towards your total income, and the interest you earn gets taxed according to your applicable income tax slab. Bank RDs do not get tax exemption under Section 80C. However, Post Office Recurring Deposits of five-year tenure are eligible for deduction up to ₹1.5 lakh under Section 80C.
Although the principal amount invested is not tax-deductible in most situations, the tax is levied on the interest portion, and even that is subject to taxation as per the slab rate of the individual. Therefore, it becomes necessary to report this income while filing annual returns.
TDS on RDs
Just like with Fixed Deposits, RDs are also subject to TDS (Tax Deducted at Source) on the interest earned. Here’s how TDS is applied:
When PAN is Provided:
- TDS is deducted at 10% if the annual interest income exceeds:
- ₹40,000 for regular taxpayers
- ₹50,000 for senior citizens
When PAN is Not Provided:
- TDS is deducted at a higher rate of 20%.
- The same interest thresholds apply: ₹40,000 for non-senior citizens and ₹50,000 for senior citizens.
If your interest income from RDs is below these limits, no TDS is deducted.
Example of TDS and Tax Liability
Let’s assume your annual income is ₹3,00,000, and you earn ₹20,000 interest on your recurring deposit. Your income falls in the 10% tax slab. Your total tax payable will be ₹5,000 on income over ₹2.5 lakh. If the bank has already deducted ₹2,000 as TDS against RD interest, you still have to pay ₹3,000 as tax. The bank will provide a TDS certificate (Form 16A) for the deducted amount.
Forms to Avoid TDS Deduction
If your overall income is less than the taxable amount, you can exempt RD interest from TDS by furnishing the necessary declaration forms. These should be given to the bank at the beginning of the financial year so that no TDS is deducted. Failure to give these forms, especially when one is eligible, can result in unnecessary deductions of TDS, which you would have to recover through your income tax return.
- Form 15G: For people below the age of 60 years whose tax on the total income is nil.
- Form 15H: For senior citizens (above 60 years) whose tax on the total income is nil.
Eligibility Conditions
- Must be an Indian resident.
- Total income tax liability must be nil.
- Cannot be a company or a firm.
No Automatic Exemption on RD Investments
One common misunderstanding is assuming that RD investments qualify for automatic tax exemptions. In reality:
- Bank RDs are not exempt from tax under Section 80C.
- Interest received is taxable, and no automatic exemption in case the investment period is long-term.
- Post Office RDs can be considered under Section 80C only if they’re kept for five years, yet even in that case, interest income is taxable depending on your income bracket.
Final Thoughts!
Recurring deposits are indeed a safe and systematic way of saving your hard-earned money. It is also true that a portion of what you earn from your savings and investments goes towards your tax liability. Therefore, knowing how much tax you may have to pay on the sum generated from your RD will allow you to make accurate assumptions and plan your future finances more effectively. Get familiar with the tax rules and applications, talk to professionals if needed, and make sure your finances are not just profitable but also tax-compliant.