Many savers choose Recurring Deposits (RDs) because they offer predictable, regular returns every month. This steady income appeal makes RDs a popular choice across professions. While RDs help your savings grow over time, it is important to be aware of the tax implications associated with the interest they earn.
This article explains how taxation on RD interest works, what “tax on recurring deposit interest” means, how TDS on RD is applied, and what exemption or declaration options are available under Indian tax rules.
Is Recurring Deposit Taxable?
Yes. Interest earned on a Recurring Deposit is taxable and is treated as “Income from Other Sources” for income tax purposes. Unlike certain government-backed schemes such as Sukanya Samriddhi Yojana (SSY) and Public Provident Fund (PPF), RD interest does not enjoy tax-exempt status.
The interest accumulates each month and is fully taxable either when it is credited to your account or when it becomes due, depending on how the bank records interest.
RD Tax Treatment Under Income Tax Rules
The tax on RD interest depends on your total annual income and the tax slab you fall into. Interest earned from RDs is added to your gross income and taxed according to your applicable slab rate.
Example to illustrate:
- If you invest ₹5,000 every month in an RD for one year at an interest rate of 6.5%, the maturity amount would be around ₹65,000 including interest.
- The interest portion—approximately ₹1,400–₹1,600 in this example—will be added to your taxable income for the year.
- You will pay tax on that interest at the rate corresponding to your income tax slab. For instance, if you fall in the 20% tax slab, RD interest will be taxed at 20%.
When planning RDs, consider post-tax returns rather than just the nominal interest rate, so you have a clear view of real returns after taxes.
TDS on RD: When and How It Is Deducted
Banks are required to deduct Tax Deducted at Source (TDS) on RD interest when the total interest earned from deposits with the same bank in a financial year crosses specified thresholds.
Key points:
- If your interest income from deposits in the same bank exceeds ₹40,000 in a financial year (₹50,000 for senior citizens), the bank will deduct TDS at 10% on the amount of interest above the threshold.
- If you have not submitted your PAN to the bank, TDS may be deducted at a higher rate of 20%.
- TDS deducted by the bank is reflected on Form 26AS and can be claimed as a credit while filing your income tax return.
TDS on RD is not a final tax. If your total taxable income for the year is below the tax threshold or taxed at a lower rate, you can claim a refund of excess TDS when you file your return.
Exemption and Declaration Options
If you expect your total taxable income to be below the basic exemption limit, you can avoid TDS by submitting Form 15G (for those below 60) or Form 15H (for senior citizens) to the bank at the beginning of the financial year. On receiving a valid form, the bank will not deduct TDS on interest income up to the specified limit.
Submit forms only if you genuinely qualify; providing incorrect information may attract penalties. Verify your projected annual income and tax liability before submitting Form 15G/15H.
To Sum Up
Recurring Deposits are a low-risk way to save with steady returns, but understanding tax treatment is essential to avoid surprises and to accurately estimate post-tax returns. RD interest is taxable as Income from Other Sources and may be subject to TDS if interest income from a bank exceeds the threshold. Keeping track of your total income, submitting Form 15G/15H if eligible, and accounting for TDS when filing returns will help you optimise the net benefits of RDs.
FAQs
How much RD interest is tax-free?
There is no separate tax-exempt amount for RD interest alone. Interest from RDs becomes tax-free only if your total annual gross income is below the basic exemption limit (for example, ₹2.5 lakh for individuals below 60 years). If you are below the exemption threshold, you may submit Form 15G/15H to prevent TDS deductions.
Is interest on FD and RD taxable?
Yes. Interest earned on both Fixed Deposits (FDs) and Recurring Deposits (RDs) is taxable and is treated as Income from Other Sources. Interest of any nature—regular or irregular—must be included in your taxable income and will be taxed according to your applicable income tax slab.