Tax on Recurring Deposit Interest

Recurring deposit (RD) has long been an attractive investment proposition among Indian investors. One of the major factors drawing investors towards it is the flexibility to deposit regularly and earn interest on it. While it may be a popular investment, a key point you must keep in mind is that the RD interest is taxable in the hands of the investors.

If you, like many others in India, are planning to invest in this investment option, you must be aware of the various aspects of tax on recurring deposit interest. It will help you make effective and well-informed investment decisions. Let us delve into the complex world of tax on RD interest and understand the various implications.

• Recurring deposit (RD) interest is taxable in the hands of the investor at the appropriate income tax slab applicable to them.
• RD interest that exceeds Rs. 40,000 per financial year (for regular individuals) and Rs. 50,000 per financial year (for senior citizens) will be subject to tax deduction at source (TDS).
• The rate of TDS on recurring deposit interest is 10% if PAN details are provided. If the PAN details of the investor are not available, the rate of TDS deduction will be 20%.
• Investors with total income below the basic exemption limit can submit Form 15G (for regular individuals) or Form 15H (for senior citizens) to avoid TDS on recurring deposit interest.

Tax deducted at source (TDS) is a method of collecting income tax at the point where the income is generated. For recurring deposits, TDS is applicable on the interest earned and not on the principal investment amount.

The rate at which TDS on the recurring deposit interest is deducted is determined based on whether or not the investor provided their PAN details at the time of opening an RD account.

• If PAN details were provided
  If the investor provides the details of their PAN while opening an RD account, the rate at which TDS on recurring deposit interest is deducted would be 10%. For example, if the RD interest in a financial year is Rs. 1,00,000, a TDS of Rs. 10,000 (Rs. 1,00,000 x 10%) will be deducted, and the remaining interest of Rs. 90,000 will be credited to the investor’s account.

• If PAN details were not provided
  If the investor does not provide the details of their PAN while opening an RD account, TDS on recurring deposit interest will be deducted at a higher rate of 20%. For instance, if the RD interest in a financial year is Rs. 1,00,000, a TDS of Rs. 20,000 (Rs. 1,00,000 x 20%) will be deducted if the PAN details of the investor are unavailable.

According to the Income Tax Act, 1961, interest earned from a recurring deposit is treated as ‘Income from Other Sources’. This amount is added to your total income and taxed as per your income slab.

However, in the case of a National Savings Recurring Deposit (5-year RD by India Post), no TDS is deducted. Investors can also claim tax benefits under section 80C, with a maximum deduction of Rs. 1.5 lakh per financial year.

1. Applicability of TDS

TDS on recurring deposit interest is only deducted if the total interest earned in a financial year exceeds a certain limit. This limit is set at Rs. 40,000 per financial year for regular taxpayers and Rs. 50,000 per financial year for senior citizen taxpayers. If the RD interest does not exceed this threshold limit, TDS will not be applicable, and the investor will get the entire accrued interest credited to their account.

2. Higher deduction rate

As you have already seen, if an investor does not provide their PAN details at the time of opening an RD account, they will be subject to TDS on recurring deposit interest at a higher rate of 20%. Therefore, investors must make sure to provide the details of their PAN to avoid TDS deductions at a higher rate.

3. Threshold difference

Senior citizens often rely heavily on interest income from their savings to meet their living expenses. To help older individuals get more income and reduce their tax burden, the government of India has set the TDS threshold limit at Rs. 50,000 per financial year, which is Rs. 10,000 more than the threshold limit for regular individuals.

4. Exceptions for lower-income individuals

Individuals with total income below the basic exemption limit as per the Income Tax Act of 1961 can avoid the deduction of tax on recurring deposit interest at the source by submitting Form 15G or Form 15H. This allows them to receive the entire accrued interest without any tax deduction at source.

In addition to the recurring deposit income tax exemptions listed above, the Income Tax Act of 1961 also provides another major benefit for senior citizen investors.

As per section 80TTB of the Income Tax Act of 1961, senior citizen investors can claim RD interest to the tune of Rs. 50,000 per financial year as a deduction from their total income. This will help them save tax by lowering their total taxable income. However, the recurring deposit tax exemption under section 80TTB is only available under the old income tax regime.

Form 15G, 15H and 16A are three crucial forms that pertain to tax on RD returns. Here is an in-depth overview of each of these three forms, their purpose, and the conditions that need to be satisfied to submit them.

Form 15G

Form 15G is a self-declaration form that can be submitted to a bank or post office where the RD account is located to avoid the deduction of tax on recurring deposit interest at the source. However, only an individual who satisfies the following conditions can submit the form.

• Must be an individual or a Hindu Undivided Family (HUF)
• Must be an Indian citizen
• Must be below 60 years of age
• Total income must be below the basic exemption limit

Form 15H

Form 15H is also a self-declaration form that RD investors can submit to a bank or post office where their account is located to avoid TDS on recurring deposit interest. The form can be submitted only if the individual satisfies the following conditions.

• Must be an Indian citizen and resident
• Must be above 60 years of age
• Total income must be below the basic exemption limit

Form 16A

Form 16A is a TDS certificate that the bank or post office in which investors have an RD account issue. The form is only issued if the tax on recurring deposit interest is deducted at the source. It serves as proof of TDS deduction and consists of details of the RD interest paid out and tax deducted. Form 16A is an essential document that can be helpful when filing income tax returns.

Strategies to minimise tax liability on RDs

Here are some practical strategies to help you cut down your tax burden:

Distribute RDs Among Family Members
You can open RDs in the name of different family members. If the annual interest for each RD stays below Rs. 10,000, no TDS is deducted. This way, you stay within the limit and reduce your overall tax outgo.

Use Tax-Saving Investments
Pair your RD with tax-saving options such as 5-year Tax-Saver FDs or eligible home loan repayments. These not only reduce your taxable income but also boost your savings.

By combining these approaches, you can lower taxes effectively while growing your wealth steadily.

A thorough understanding of the various aspects of tax on RD interest is essential for effective financial planning. Although recurring deposits may not provide high returns like market-linked investment options, they continue to be a popular avenue for savings due to their flexibility and accessibility. Additionally, the various recurring deposit income tax exemptions also make the investment options more attractive to investors, especially those with a low tolerance for risk.

If you are seeking stable returns and capital preservation, you may consider including RDs in your investment portfolio. However, remember to provide your PAN details at the time of account opening to avoid the deduction of tax TDS on recurring deposit interest at a higher rate.

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