Recurring Deposits (RD) are a kind of Fixed Deposits (FD) that are deposited in the bank in regular instalments. While FDs are for those who have a large sum to secure, RDs are good for those who can save only a small sum from the salary every month. The interest earned on RD can either be retained in the RD account and thus reinvested, or can be withdrawn or redirected to your savings account.
Tax Implications on RDs:
Until June 1, 2015, interest earned on Recurring Deposits was not taxable. However, in the 2015 Union Budget, RDs were added to the category of Fixed Deposits under Section 194A under which a 10% tax is applicable on the interest earned from RDs. But if the interest earned is less than Rs. 10,000, then the amount is exempt from tax. However, if the bank does not have your PAN information, TDS will be levied at the rate of 20% of the interest earned.
It is always in your best interests to give your PAN information to all financial institutions you transact with. If you do not have a PAN card, you need to submit a non-PAN holder statement through Form 60.
The interest earned will be added to your income and tax will be computed as per the income tax slab you fall under. If the total tax due after this addition is less than the TDS deducted at the disbursal of recurring deposit interest, then you can claim a refund on the TDS paid. If the total tax liability on your income is higher than the TDS deducted, then you have to pay the remaining amount to the Income Tax Department.
To avoid this deduction-and-refund process, you can declare to the bank through Form 15G and 15H that the TDS deducted could be more than the total tax you are liable to pay. On receipt of Form 15G and 15H, the bank will deduct less TDS or zero TDS, as per the income you declare. These forms are valid for 1 year only, and new forms need to be submitted for the next financial year if you need to enjoy its benefits.
Even if the TDS has already been deducted on the interest earned on RDs, make sure to declare the interest earned as income in your income tax return.
Savings Accounts, FDs and RDs – Which Is Better?
Let us look at the 3 small savings instruments comparatively.
- TDS Applicability: Fixed Deposits and Recurring Deposits are subject to a 10% TDS for amounts higher than Rs. 10,000 under Section 194A, while savings account interest is not eligible for TDS.
- Income Tax Applicability: The interest earned on Fixed Deposits and Recurring Deposits is taxed along with your income, as per your income tax slab, but the interest earned on Savings Accounts is tax-deductible up to Rs. 10,000 under Section 80TTA of the Income Tax Act.
- Interest Rate: Savings accounts usually yield the lowest interest rate, as the amount in a savings account is more liquid and mobile. Fixed Deposits and Recurring Deposits come at various interest rates depending on the tenure of the term deposit.
If you are investing large amounts, or intend to save a regular amount every month, FDs and RDs give you better returns than if the amount lies in your savings account. For example, the country’s lead banker State Bank of India (SBI) yields 4% interest, while its 1-year Fixed Deposit and Recurring Deposit scheme both give 7.25%.
Frequently Asked Questions on TDS on Recurring Deposits:
- I received an interest of Rs. 9,500 on my RD, but the bank deducted TDS on the amount. How do I get back my money?
If the bank has deducted TDS despite the amount being lower than Rs. 10,000, then you can claim a refund from the Income Tax Department while filing the ITR.
- What do I do about TDS on RDs if I do not have a PAN card?
To prevent the bank from deducting 20% TDS on the interest earned from Recurring Deposits, you need to submit a declaration to the bank through Form 60. If there is time for the RD to start yielding interest, then apply for a PAN card as soon as possible and register it with the bank.
- Which is a better option to save tax – Fixed Deposits or Recurring Deposits?
Fixed Deposits and Recurring Deposits are charged at the same rate – a TDS of 10% on the interest earned and addition of this interest to the income for income tax computation. Both of them also yield similar rates of return. The only difference is whether you have a large sum to invest in an FD or a smaller amount you can keep aside from your income every month.