Understanding the impact of income tax on Recurring Deposit

A Recurring Deposit (RD) is a popular saving scheme providing fixed interest rates and flexible tenures. However, understanding the income tax on Recurring Deposit is essential to make the most of this investment. Knowing the tax implications will help you plan better and avoid any unexpected liabilities.

What is the tax on RD interest?

Interest earned on RDs is fully taxable. Unlike Savings Accounts with tax-free interest up to ₹10,000, RD interest is added to your total income and taxed according to your income tax slab. Higher earners may face significant tax on their RD returns.

Recurring Deposit tax exemption

While interest earned on Recurring Deposits is taxable, there are no specific exemptions for RDs under the current income tax laws. Therefore, all interest from RDs must be declared in your income tax returns.

What is TDS on RD interest?

Tax Deducted at Source (TDS) is a mechanism where tax is deducted from your interest income at the source itself. Here's how TDS on RD interest works:

• When PAN Card is provided: If your interest income from all RDs exceeds ₹40,000 in a financial year, a TDS of 10% is deducted by the bank.
• When PAN Card is not provided: The TDS rate jumps to 20% if you haven't provided your PAN to the bank.

How to calculate TDS on RD

1. Determine the total interest earned from your RDs in a financial year.
2. If the total interest exceeds ₹40,000, apply 10% TDS if PAN is provided. Apply 20% TDS if PAN is not provided.

Income tax on Recurring Deposit amount

The principal amount of your Recurring Deposit is not taxed. However, the interest accrued is taxable. For instance, if you earn ₹50,000 interest on your RD in a year, this amount will be added to your gross income and taxed according to your income tax slab.

Form 15G, Form 15H and Form 16A

These forms are crucial for managing TDS on your RD.

• Form 15G: For individuals below 60 years, this form declares that your total income is below the taxable limit and hence, TDS should not be deducted.
• Form 15H: For senior citizens (60 years and above), this form serves a similar purpose as Form 15G.
• Form 16A: This form is issued by the bank, detailing the TDS deducted and can be used while filing your income tax returns.

Form 15G conditions

• You must be a resident individual or HUF.
• Your age should be below 60 years.
• Your total income should be below the taxable limit.

Form 15H conditions

• You must be a resident individual.
• Your age should be 60 years or above.
• Your total income should be below the taxable limit.

Declare interest rate earned on Recurring Deposit in ITR

1. Add the total interest earned to your total income under the head "Income from Other Sources".
2. If TDS has been deducted, include this in the 'Tax Paid' section.
3. Ensure all interest, including RD interest, is declared to avoid any legal hassles.

Also Read: Fixed Deposit Vs Recurring Deposit: What should you choose?

Conclusion

Understanding the income tax on RD is pivotal for effective financial management. Make sure to declare your interest income correctly and use forms like 15G or 15H to avoid unnecessary TDS. With the right knowledge, you can ensure that your RD remains a beneficial investment option.

Axis Bank's Recurring Deposit helps you build your savings through systematic deposits every month. Open a Recurring Deposit online with minimum monthly instalments of ₹500 and tenures ranging from 6 months to 10 years.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.