Recurring Deposit & Taxes: Everything you need to know


Is Recurring Deposit Tax Free

Recurring Deposit is one of the most popular savings instruments in Indian households. It allows you to save a small sum of money regularly over the long term and build a bigger sum. Offered by banks and post offices, RD attracts taxes like any other financial investment. 

With an RD account, a customer can earn interest on his/her regular savings, which will be paid out along with the principal amount at the end of the maturity period.

Now, let’s understand how taxes work in the case of RD.

TDS on Recurring Deposit Interest Earned

Financial investments like RDs, FDs, or mutual funds (equity funds, debt funds) are known to attract taxes from the government. However, the tax they attract depends on the interest income earned by the investor on their principal RD amount.

The interest is added to your total income and is put under the head “income from other sources” in your income tax return. 

If the RD interest earned is above or equal to Rs. 40,000 (or Rs. 50,000 in case of senior citizens) then TDS is charged by the government. Wondering what TDS is?

Simply understand that when you receive certain payments, the person paying you has to deduct tax before making the payment. In this case, the tax on the RD is deducted by the bank or post office directly before you get the interest income. This Tax Deducted at Source or TDS and is paid to the Central Government by the deductor. 

This is how the TDS or Tax Deducted at Source is charged:

  • Interest less than Rs. 40,000 If the interest amount is lesser than Rs. 40,000, in that case, no TDS is charged. Before budget 2019, the limit of TDS on interest income was Rs. 10,000. This has been done keeping in mind the interest of small depositors.

  • Interest greater than Rs. 40,000TDS is charged on the interest amount you earn if it is greater than Rs. 40,000. Before budget 2019, the limit of TDS on interest income was Rs. 10,000. The rate of TDS charged will depend on the status of the PAN card:
  • TDS @10%If you provide your PAN card to the bank/post office.
  • TDS @20% If you fail to provide your PAN card then the TDS will be deducted at the rate of 20%. 

Income Tax on Recurring Deposit Principal Amount

The money you deposit in the bank or post office as installments for recurring deposit will be counted under the yearly income of the investor. All your incomes from all your sources are added and taxed together as per the income tax slab you fall under.  

Remember that when TDS is deducted, it is added to your total tax liability. The TDS is not deducted over and above your total tax liability. When you add your interest income to your total income and calculate as per the income tax slab, then the net amount of tax that comes out is your total tax liability. This TDS is then adjusted against your final tax liability. This is how you are taxed depending on your income tax slab:

Annual Income (in INR)

Tax Rate 

TDS (in case of interest above Rs.40,000)

   

Less than Rs. 2.50 lakhs

Not Applicable

10%

Between Rs.2.5 lakhs and Rs.5 lakhs

5% of a sum exceeding Rs.2.5 lakhs

10%

Between Rs.5 lakhs and Rs.10 lakhs

20% of a sum exceeding Rs.5 lakhs

10%

Over Rs. 10 lakhs

30% of a sum exceeding Rs.10 lakhs

10%

What happens when your overall income is less than Rs. 2.5 lakh?

When your total income is less than Rs. 2.5 lakhs, no tax is deductible since your total income is less than the minimum taxable amount of the income tax slab. 

Even if some investors may have more than Rs 40,000 (or Rs. 50,000 for senior citizens) interest income in a year, they still won’t be taxed since their total income including the interest income, is less than the minimum exempt income (Rs 2.5 lakh for FY 2020-21). 

However, if your bank has already deducted TDS because your interest income is more than the limit of Rs. 40,000 (or Rs. 50,000 for senior citizens) then, you can submit Form 15G or 15H to claim interest income without TDS.

Form 15G and Form 15H

Form 15G is a declaration form filled out by all bank deposit holders (individuals or HUF members) below 60 years of age to ensure that no TDS (Tax Deduction at Source) is deducted from their interest income in a year. Here, bank deposits include all Fixed Deposits, Recurring deposits, etc. 

As per the income tax rules, it’s mandatory for banks to deduct tax at source (TDS) in case the interest earned on your bank deposits is more than Rs. 40,000 in a financial year as updated at the start of FY 2019-20. Earlier the exemption limit was Rs. 10,000.

Form 15H is a declaration form filled out by all bank deposit holders (only individuals and not HUF members) who are 60 years of age or above to ensure that no TDS (tax deduction at source) is deducted from their interest income in a year.

Post Office Recurring Deposit Scheme Tax Exemption

Post Office RD accounts are exempted from tax deductions under Section 80C of the Income Tax Act. With this, individuals can claim up to Rs.1.5 lakh per annum as tax exemption. However, the interest earned through the Post Office RD will be subjected to tax deductions. The account holders will be required to pay tax on the interest amount as per the income tax slab.

FAQs

Is the interest earned on RD taxable?

Yes, the interest amount earned from your RD account is taxable. It will be charged at the rate of 10% if you submit your bank to the required financial institution and at the rate of 20% if you fail to do so.

Is Recurring Deposit Tax Free?

No, like any other investment, a Recurring Deposit attracts taxes based on the interest income as well as the principal amount.

Is Recurring Deposit tax free under 80C?

A Recurring Deposit in a bank is not a tax saving option under Section 80C of the IT act. However, an FD helps in saving income tax under Section 80C.
That being said, a post office RD offers tax exemption under Section 80C of the IT act, and individuals can claim up to Rs.1.5 lakh per annum as tax exemption under this section. But remember that the money is locked in for a period of 5 years. 

How much TDS is deducted from interest earned on a RD?

A TDS of 10% is deducted on the interest earned if it is greater than Rs. 40,000 or Rs. 50,000 in the case of senior citizens. The rate becomes 20% if you fail to submit your PAN.

Which forms will help you in saving TDS on RD?

If your interest income is over Rs. 40,000 or Rs. 50,000 for senior citizens but your total income is below the minimum taxable limit (RS.2.5 lakhs for FY 20-21) then you need to submit Form 15G or Form 15H to ensure that no TDS is deducted. You need to fill and submit Form 15G if you are below 60 years of age and Form 15H if you are 60 or above.

Written by

Priyanshi Bhardwaj