Is Interest on Recurring Deposit Taxable?

There is a famous saying "If anything is free there will soon be a tax on it". The Government is smart. It looks for ways to tax returns on your earnings.

Do you know what is a recurring deposit?

A recurring deposit is similar to an SIP (Systematic Investment Plan) in a mutual fund. You want to invest in a fixed deposit but do not have sufficient money to do so.

A recurring deposit is similar to a fixed deposit, only you invest small sums of money regularly which earns an interest equal to a fixed deposit.

You will have to first open a savings bank account in your bank. You deposit money into this savings bank account.

A fixed sum of money is deducted regularly (say each month) from your saving bank account and transferred to your recurring deposit.

A 5 year recurring deposit can fetch you an interest of 8.4% per annum.

How are recurring deposits taxed?

Currently you are not deducted any tax on the interest you earn from your recurring deposit (RD) account in the bank, Co-operative bank or even a Co-operative credit society in a year.

This means there is no TDS (Tax Deducted at Source) on the interest income you get from your recurring deposit.

New rules in the Union Budget 2015-16

• As per the new rule proposed to come into force from June 1st 2015 TDS will also be deducted from recurring deposits @10% on the interest earned under Section 194 A just as in fixed deposits.
• No TDS is deducted on the interest income on the recurring deposit up to INR 10,000.

How do the new rules on taxation of interest on a recurring deposit affect you?

You are a tax payer in India under 60 years of age.

Individual Tax Payers up to the age of 60 years (Male/Female)

Annual Income (INR)	Tax Rate
0 - 2,50,000	Nil
2,50,001-5,00,000	10 %
5,00,001-10,00,000	20 %
Above 10,00,000	30 %

You have to pay a total education cess of 3%
(Education cess at 2% + Secondary and higher education cess at 1%)

TDS is deducted on Recurring Deposits as follows :

Income tax on interest income from Recurring Deposits
Income Slab	TDS charged by your bank
Below INR 2.5 Lakhs	10 %
INR 2.5 Lakhs - 5 Lakhs	10 %
INR 5 lakhs - 10 Lakhs	10 %
Above INR 10 Lakhs	10 %

How is the interest on your recurring deposit taxed if you earn an income below INR 2.5 Lakhs?

If your taxable income is below INR 2.5 Lakhs and you earn interest income on your recurring deposit in excess of INR 10,000 a year, then the bank will deduct TDS on this income in spite of you being below the basic tax exemption slab.

You will have to fill form 15 G (form 15 H) in case of you being a senior citizen and claim a refund on the TDS you have paid in your ITR (Income Tax Returns) just as in a fixed deposit.

You earn an income between INR 2.5- INR 5 Lakhs

If your taxable income is between INR 2.5-5 Lakhs and you earn interest income on your recurring deposit in excess of INR 10,000 a year, then the bank will deduct TDS on this income.

Your bank will deduct TDS and pay this amount directly to the Government on your behalf. You will then receive a TDS certificate (form 16 A) from the bank.

You need not pay any extra income tax because the income tax rate for this slab is 10% and your recurring deposit has already been charged tax ([email protected]%) which has been paid.

You need to show proof (Form 16 A) while filing your ITR.

You earn an income between INR 5- INR 10 Lakhs

If you earn an income between INR 5-10 Lakhs and an interest income on your recurring deposit in excess of INR 10,000 a year, then the bank will deduct TDS on this income.

You fall in the taxable bracket of INR 5-10 Lakhs where you are taxed at 20%.The TDS on the interest of your recurring deposit is deducted at 10%.

You fall in the taxable bracket of INR 5- 10 Lakhs where the interest income from your recurring deposit is taxed at 20% but only a TDS of 10% has been deducted from your interest income on the recurring deposit by the bank.

You have to pay an additional 10.3% on the interest income on your recurring deposit when you file your ITR (Income Tax Returns).

You earn an income above INR 10 Lakhs

If your income is over INR 10 Lakhs and you earn an interest income on your recurring deposit in excess of INR 10,000 a year, then the bank will deduct TDS on this income.

You fall in the taxable bracket above INR 10 Lakhs where you are taxed at 30%.The TDS on the interest of your recurring deposit is deducted at 10%.

You fall in the taxable bracket above INR 10 Lakhs where the interest income from your recurring deposit is taxed at 30% but only a TDS of 10% has been deducted from your interest income on the recurring deposit by your bank.

You have to pay an additional 20.6% on the interest income on your recurring deposit when you file your ITR (Income Tax Returns). There is a famous saying "Every Advantage Has Its Tax". Recurring deposits were enjoying tax free interest for many years until its advantage was discovered by the tax department and put to an end.