Like several investment options, even recurring deposits are savings instruments you can use for investment. They are, in many ways, akin to a Fixed Deposit (FD). However, this type of account has the advantage of providing more flexibility than FDs.
RDs allow investors to deposit a certain monthly sum conveniently drawn from their savings account, with interest rates ranging from 2.50% to 8.50%. Interest rates related to RD accounts are similar to those found in FDs; however, offering greater flexibility makes RDs stand out.
When opening an RD account, investors are guaranteed a certain rate of return on their investment, albeit taxable at relevant rates. This article provides an overview of tax on recurring deposit accounts.
TDS on Recurring Deposit
Like other personal savings, even recurring deposits (RD) have tax. They attract Tax Deducted at Source (TDS), also known as income tax, and under the Income Tax Act of 1961, TDS applies to Indian citizens with adjustments on the taxation slabs.
When a PAN card is provided:
When a PAN card is not provided:
If your interest income passes the ₹40,000 mark, the bank will deduct your TDS on RD at a 10% rate. And if not, your bank account will not receive any interest rate, and there won’t be any reduction of TDS on your recurring deposit.
If you don’t provide a PAN card to the bank, it will deduct TDS on RD at a 20% interest rate. The threshold for normal people on their TDS is ₹40,000, while for senior citizens, it is ₹50,000.
How to Calculate TDS on RD
For individuals below 60, the threshold limit for their TDS on RD is ₹40,000 every year, while for senior citizens, it is ₹50,000. If you provide the bank with your PAN card, it’ll deduct 10% of the interest rate only if you cross the threshold limit. However, if you don’t provide the bank with a PAN card, it will deduct 20% of TDS on your recurring deposit.
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Income Tax on Recurring Deposit Amount
Under Section 80C of the Income Tax Act 1961, investments in bank recurring deposits are not exempt from taxation. Thus, any investments made in any bank’s RD will not be eligible for a tax deduction. However, according to the same act, a post office RD with five years duration can be claimed as a deduction of up to Rs.1.5 lakhs.
Even if an individual’s income falls under the non-taxable income slab, they must submit Form 15G to be taxed on the interest earned from both fixed and recurring deposits.
The applicable tax on RD interest earned from an RD scheme is determined by the individual’s tax slab rate.
Form 15G, Form 15H, and Form 16A
To save taxation on your income, Form 15G must be filled out. Form 16A, on the other hand, is provided by your employer and is used to deduct TDS from your income, regardless of your eligibility. It is important to note that Form 15G only applies to individuals under 60. For those aged 60 and over (senior citizens), Form 15H is similar to ITR submission but is specifically tailored to their needs.
- Conditions for Form 15H
- The taxpayer should be an Indian and residing in the country
- The taxpayer needs to be a senior citizen; when filing the form, their age should be 60
- Any tax on the total income will be zero
- Conditions for Form 15G
- Should be a trust, individual, or HUF; it cannot be a company or firm
- The age should be below 60
- You should have an Indian citizenship
- The tax on the total income will be nil
Recurring Deposit Tax Exemption
Recurring deposits with income tax exemption are rare, yet certain instruments are categorised as such. People often seek recurring deposits that can save them some tax to ensure they don’t waste their savings. But there’s only limited information available on whether the interest earned on recurring deposits is taxable or not.
For instance, at the end of the year, you are liable to pay an income tax of 10% on the interest income of ₹50,000 earned from your recurring deposit, as your total annual income is ₹3,00,000. This amounts to ₹5,000, and TDS of ₹2,000 has already been deducted from the interest earned on the deposit. Therefore, you must pay the government a total of ₹3,000 as income tax. The bank will provide you with a TDS certificate to prove that the TDS of ₹2,000 has been duly paid to the government.
Tax on Indian Post Office Recurring Deposit
Post Office Recurring Deposit (PORD) is a government-supported savings program which allows investors to make small investments for up to 60 months. Despite being eligible for Section 80C of the Income Tax Act of 1961, PORD investments are not eligible for tax exemption. However, the depositor must pay taxes on the accrued interest income as per their applicable income tax rate.
How to Declare Interest Rate Earned on Recurring Deposit in ITR
When filing income tax returns, it is essential to declare any income from sources other than the four usual heads. These may include, but are not limited to, interest from savings accounts, fixed deposits (FD), recurring deposits (RD), and dividend income.
In the ITR form, the interest received from an RD must be inserted under the section for ‘income from other sources’. This amount must include the total interest received from all deposits. You can also request an interest certificate from the local post office branch.
Is RD taxable?
Upon maturity, the investor will receive the initial investment amount and the accompanying interest income, although only the interest earned with the RD is subject to taxation.
Is post office RD tax-free?
Post Office Recurring Deposits (RDs) are not tax-exempt; investments made in them are not qualified for tax deductions as per Section 80C of the Income Tax Act, 1961. Nevertheless, taxpayers can avail of the tax benefit while filing their ITR. It is important to note that the earned interest is taxable as per the individual’s relevant government tax slab rate.
Is there tax on RD interest?
Yes, interest income generated from recurring deposit investments is subject to taxation according to the individual’s applicable income tax slab rate.
How to save tax on RD?
Tax deduction on investment in Bank Recurring Deposit (RD) is not allowed under Section 80C of the Income Tax Act, 1961. Consequently, it is impossible to avail of a tax benefit for such investments. However, a term deposit of 5 years with a post office is eligible for tax exemption under Section 80C of the Income Tax Act, 1961.
I am below 60 years of age. Which form do I need to fill out to save taxation on my income?
If you’re below 60 and want to save taxation on your income, you need to fill Form 15G.
What percentage is deducted as TDS on recurring deposits?
A 10% TDS on RD interest rate is deducted if you provide the bank with your PAN card and your threshold is above ₹40,000. If you don’t show the bank your PAN card, a 20% TDS on RD is deducted.