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Recurring Deposits (RDs) offer a disciplined approach to savings, allowing individuals to invest fixed amounts at regular intervals. With flexible tenures, RDs provide a secure avenue for those seeking steady returns. But, many of you might be wondering, is RD interest taxable? However, as investors explore the advantages of RDs, it's crucial to understand the tax implications associated with the interest earned. In this blog, we delve into the tax on RD interest in 2023, shedding light on TDS rates, PAN card requirements, and the overall income tax implications for investors.
RDs or recurring deposits are investment instruments that allow investors to make periodic investments and save huge amounts in the long run. RDs provide investors with the flexibility to decide the tenure of the deposit and the fixed amount that they want to deposit according to their convenience.
There are various benefits of investing in a recurring deposit or RD. Below are the major benefits of investing in RD -
Recurring deposit schemes, like other methods for saving taxes and investing, are subject to taxation. If the total interest earned from a recurring deposit exceeds Rs. 10,000 in a financial year, a 10% Tax Deducted at Source (TDS) is applied. Comparing this to SIP schemes, it's evident that SIPs offer greater long-term benefits. This is because long-term gains from equity investments are exempt from taxes, making SIPs that invest in Equity Linked Mutual Funds (ELSS) tax-free after one year.
If you want to start investing small amounts every month as opposed to lumpsum investments at once. These term deposits allow you to contribute a fixed amount monthly for a set period, providing competitive interest rates similar to fixed deposits.
For first-time investors seeking a secure option, recurring deposits are well-suited. They can be initiated with any bank, devoid of market risks. Monthly deposits of any amount are accepted, and banks provide an annual interest rate, paid out quarterly or semi-annually.
Recurring deposits are a secure investment choice, permitting regular contributions over a predetermined period with attractive interest rates comparable to fixed deposits. Any bank can facilitate recurring deposits, ensuring a risk-free investment. Monthly deposits are customizable, with banks determining an annual interest rate, disbursed quarterly or semi-annually.
To initiate a recurring deposit account with any bank, a savings account with the chosen bank is a prerequisite. The process involves depositing funds into the savings account, from which the bank deducts the monthly contribution, channeling it to the recurring deposit account.
For the chosen bank's recurring deposit scheme, having a savings account with that bank is mandatory. The procedure involves placing funds in the savings account, with the bank deducting the monthly installment and directing it to the recurring deposit account.
Tax implications:
Just like any other savings instrument, such as fixed deposits, recurring deposits also attract tax. Recurring deposits also attract TDS, also known as tax deducted at source. TDS is also known as income tax, and it applies to Indian citizens under the Income Tax Act 1961. These laws generally remain the same except for a few adjustments and amendments in the tax slab.
However, it may vary depending on whether a PAN card is provided or not.
When PAN Card is Provided - If the investor provides a PAN card, then TDS is deducted by the bank at a 10% rate. The TDS threshold for individuals is Rs.40,000. In other words, if interest income exceeds Rs.40,000, the bank will deduct TDS at lower rates. The TDS threshold for senior citizens is Rs.50,000.
When PAN Card is Not Provided - If PAN card is not provided, then the banks deduct TDS at the rate of 20%. The TDS threshold is Rs.40,000 for normal people and Rs.50,000 for senior citizens.
The amount of money that the investor deposits every year in the RD account will be considered a part of his annual income and subject to TDS @10%. However, if the interest received on RD is less than or equal to Rs.10,000, then no TDS is deducted. Similarly, if the investor fails to provide a PAN card, then TDS is charged @20%.
Investments made in RD are exempt from tax under section 80C of the Income Tax Act. While RDs made with banks are not deductible from income, an RD opened with the post office for 5 years is deductible under section 80C of the Income Tax Act.
If the investor’s income falls under the non-taxable income slab, they have to submit form 15G to avoid deducting TDS on FDs and RDs. However, the interest earned from an RD can be taxed at the income tax slab rates applicable to the investor.
Here’s an example illustrating how SIPs outperform RDs in terms of returns. Let's say you invest Rs.10,000 every month in your RD account for 15 years. RDs typically offer interest rates ranging from 7% to 8%. Assuming an 8% interest rate for RD calculations, you would accumulate Rs.34.6 lakh from your RD investment. Now, if you were to invest the same amount in a SIP with an average return of 15%, you would earn Rs.66.8 lakh. Although the total investment remains constant in both cases, SIPs yield higher returns compared to RDs.
Considering Other Investment Options
If you are comfortable with making regular investments, you might also consider mutual fund SIPs. A SIP, or Systematic Investment Plan, channels your monthly deposits into mutual funds that generally offer higher interest rates than traditional RD schemes. On average, SIPs provide returns ranging from 12% to 18%, which is significantly higher than RDs.
While Recurring Deposits serve as a reliable investment option, investors must navigate the tax landscape wisely. The imposition of TDS on RD interest underscores the importance of complying with PAN card regulations to avail of lower deduction rates. Understanding the nuances of income tax on RD amounts is key to optimizing returns. However, we understand that all these provisions can be complex for normal people. If you are also among those who find taxes confusing and want expert help, you can book a call with our experts, who are always here to solve all your tax-related queries. Book a Tax Expert Now!
The interest on RD is subject to a TDS of 10%. If the interest received on your recurring deposit is equal to or less than Rs.10,000, then no TDS is applicable. However, if you fail to present your PAN information, your TDS will be deducted @20%.
There is no fixed penalty for missed payments on RD accounts. However, if you miss multiple payments consecutively, then the bank may decide to close your RD account. But it depends on the type of bank or financial institution with which you have opened your RD. Some RDs might also be flexible in the way they allow you to make payments.
As per the Income Tax Act, 1961, interest accrued from FDs is categorized as 'income from other sources' and is therefore subject to full taxation. The interest earned from FDs is added to your gross annual income, and the corresponding tax obligation is calculated in accordance with the prevailing tax regulations.
Is the maturity amount of RD subject to taxation? Upon maturity, the investor will receive both the interest and the invested amount. However, only the interest income earned on RD is taxable at the time of maturity. The interest earned on RD should be declared as 'income from other sources' when filing income tax returns.
A = P x (1 + r/100)^nt
If you initiate a recurring deposit within a quarter, the interest is calculated on a simple basis for the months until the next quarter starts. Then, from the new quarter onwards, compound interest is computed. This explains why there might be a slight variance between manual calculations and the actual amount received by the holder upon maturity.
