Income Tax on Recurring Deposit Interest: Know the Implications

Did you know the interest earned on Recurring Deposits (RDs) is taxable under the Income Tax Act, 1961? As a mandate, you have to add the interest earned on RD in a financial year to your total income under 'Income from Other Sources'. 

In this blog, we have explained the tax implications on Recurring Deposit returns. This might help you understand how much returns you would actually get once your Recurring Deposit matures.

How Much Tax is Applied on RD Interest?

Your Recurring Deposit returns, as in the interest income, is fully taxable. The interest earned is added to your total income and taxed as per your tax slab. So, if you fall under the 30% tax bracket, your tax outgo could be on the higher side. That said, the tax implications depend on how much you have earned on your RD investment.

Are There in Tax Exemptions on RD Interest? 

Unlike Savings Accounts, where you can enjoy tax-free interest up to ₹10,000, your RD returns is considered under ‘income from other sources’ and is fully taxable. That said, you still might get some relief with TDS (Tax Deducted at Source) if you meet certain terms and conditions.

TDS on RDs Explained

As per the prevailing income tax laws, if your RD interest income exceeds ₹40,000 in a financial year, a 10% TDS would be levied by the bank. This TDS is applicable if you provide a PAN card. 

If PAN card is not provided, 20% TDS would be levied by the bank. For senior citizens, the RD TDS rule remains the same, however the threshold for interest income in a financial year is extended to ₹50,000.

Do I have to Pay Income Tax on the Recurring Deposit Principal Amount?

The RD principal amount is not taxed. The interest income is added to your gross income and taxed as per the income tax slab you fall into.

Is Tax on RD Applicable if my Income is Lower than the Minimum Tax Slab?

If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens above 60 years) to the bank. This form ensures that no TDS is deducted if your income does not exceed the tax-free threshold.

My TDS Has Been Deducted, But I Fall Below the Minimum Tax Slab

If your bank has deducted TDS though you fall below the minimum tax slab, you can submit Form 16A while filing your Income Tax Returns. The deducted amount will be refunded.

Strategies to Minimise Tax Liability on RDs

Follow the below strategies to legally minimise your tax outgo:

1. Splitting Recurring Deposits

   One way to reduce the tax impact of your RD interest is by splitting your RDs among family members. If each family member has an RD with interest below ₹10,000, they won't face TDS. This strategy helps you stay under the TDS threshold, lowering your overall tax liability.

    

2. Investing in Tax-Saving Instruments

   Another effective approach is to invest in tax-saving instruments alongside your RDs. For example, investing in 5-year Tax-Saver Fixed Deposits or Home Loans can help you save on your tax obligations.

    

   Combining these strategies allows you to manage your tax liabilities better and maximise your savings growth.