Are RDs Taxable? A Complete Guide to TDS on RDs

Recurring Deposits (RDs) are a popular investment option in India, offering guaranteed returns and the flexibility of making regular contributions. However, many investors are unclear about the tax implications of their RD earnings. This guide will help to demystify Recurring Deposit tax and unravel the complexities of TDS on Recurring Deposits in India.

Understanding Recurring Deposits and Their Tax Implications

A Recurring Deposit (RD) is a type of term deposit offered by banks and post offices in India. It allows individuals to invest a fixed amount at regular intervals, typically every month, for a specified period. At the end of the tenure, the account holder receives the principal amount along with the accumulated interest.

While RDs provide a disciplined approach to saving and earn higher interest rates than Savings Accounts, it's crucial to understand their tax implications. The interest earned on Recurring Deposits is considered as "Income from Other Sources" and is taxable as per an investor's income tax slab.

What Is TDS and How Does It Apply to RDs?

TDS, or Tax Deducted at Source, is a mechanism used by the Income Tax Department to collect taxes at the source of income. In the case of RDs, the bank deducts TDS on the interest earned before crediting it to the individual's account. This deducted tax is then remitted to the government. It's important to note that TDS is not an additional tax but an advance tax payment. One can claim credit for the TDS while filing their income tax returns.

TDS is applicable on RDs if the total interest income from all RD accounts with a bank exceeds ₹40,000 in a financial year (₹50,000 for senior citizens aged 60 years and above). If PAN (Permanent Account Number) is not provided to the bank, TDS will be deducted at a higher rate of 20%.

Tax Rates on Recurring Deposits: A Detailed Overview

The actual tax on Recurring Deposit interest depends on an individual's income tax slab. In addition to the basic tax rate, a surcharge and cess are applicable based on total income. For the current financial year, the Recurring Deposit tax rates are as follows:

It's important to note that these rates are subject to change as per government notifications.

Exemptions and Thresholds for TDS on RDs

TDS is deducted only if the total interest income from all RD accounts exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). This exemption limit is not specific to each RD account but is applicable to the cumulative interest earned from all RD investments. No TDS will be deducted if the total RD interest is below the specified threshold.

• Form 15G/15H
  If an account holder's total income is below the taxable limit, they can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to avoid TDS deduction. These forms are a declaration that income is below the taxable threshold.
• Claiming TDS Refund
  If TDS has been deducted on RD interest, but an individual's total income for the financial year is below the taxable limit, they can claim a refund of the TDS by filing an income tax return.

How to Calculate TDS on Recurring Deposit Earnings

To calculate the RD tax on interest, follow these steps:

1. Compute the total interest earned from all RD accounts in a financial year.
2. If the interest exceeds ₹40,000 (₹50,000 for senior citizens), TDS will be applicable.
3. Multiply the interest amount by the applicable TDS rate (10% or 20%).
4. The result is the TDS amount that will be deducted by the bank.

Example : Suppose Mr. A is a general category investor and his RD interest income is ₹4,000. Since this is below the TDS threshold of ₹40,000, no TDS on Recurring Deposit would be deducted.

Filing Taxes: Reporting TDS on Recurring Deposits

When filing an income tax return (ITR), taxpayers need to report the interest income earned from all RDs along with the TDS deducted. The bank will provide a TDS certificate (Form 16A) mentioning the interest paid and TDS deducted. Use this information to fill the appropriate ITR form and claim the TDS as a tax credit against the total tax liability.

Also, ensure that the TDS on Recurring Deposit interest is correctly reflected in Form 26AS, an annual tax credit statement which reflects the TDS deducted. This form can be downloaded from the Income Tax Department's website.

Common Misconceptions About TDS and RDs