Income Tax on Recurring Deposit Interest: What You Need to Know

Many individuals prefer Recurring Deposits (RDs) as they seek reliable and regular returns on their savings every month. Fixed income gives the same returns every time, which makes it a popular investment for people from all kinds of professions. However, while they help grow your money over time, it’s equally important to understand the RD tax implications that come with them.

Here, we will understand how taxation works on RD interest, what tax on recurring deposit interest really means, how TDS on RD applies and what exemptions (if any) are available under Indian tax laws.

Is Recurring Deposit Taxable?

The answer is yes. Recurring deposit interest is taxed under the ‘income from other sources’ and is included in your yearly income. In contrast to Sukanya Samriddhi Yojana (SSY) and Public Provident Funds (PPF), which have.

This means that, based on how you calculate it, the interest from your RD adds up every month and is fully taxable when you receive it or when it becomes due.

RD Tax Treatment Under Income Tax Rules

The tax you pay on RD or RD tax depends on your total yearly income. The interest you earn is added to your income and taxed based on the tax slab you fall into.

Here’s an example to simplify it:

• Let’s say you invest ₹5,000 every month in an RD for one year at an interest rate of 6.5%.
  
• At the end of the year, you receive around ₹65,000, including interest.
  
• The interest earned, roughly ₹1,400–₹1,600, will be added to your taxable income.
  
• You will pay 20% tax on the RD interest if your overall income is within the 20% slab.

This makes it important to consider post-tax returns while planning your RD investments.

TDS on RD: When and How It Is Deducted

It is not known to many people that banks are expected to remove TDS on RD interest when the interest earned surpasses a certain amount.

Here’s what you need to know:

• As of now, if you earn interest above ₹40,000 (for everyone) or ₹50,000 (for senior citizens) on all your RDs, with the same bank in a financial year, the bank will apply TDS at 10%.
• The TDS rate rises to 20% if your PAN has not been submitted.
• This deduction is reported on your Form 26AS and is allowed while filing your tax return on income. 

TDS on RD is a non-final tax. In case your overall income is less than the tax bar, you can recover the amount of TDS deducted from you.

Exemption and Declaration Options

The amount less than the tax limit is exempt from TDS from bank accounts, and the person can provide the bank with Form 15G or Form 15H at the start of the financial year for that purpose.

As a result, the bank sees that your income is not above the tax rate, so you won’t have money deducted for taxes. Still, not meeting the terms can lead to fines, which is why you should check your tax situation first.

To Sum Up 

Recurring Deposits are a reliable savings option offering steady returns with minimal risk. However, understanding the RD tax implications is crucial to avoid surprises at maturity. Whether it’s knowing when tax on recurring deposit interest applies or how TDS on RD impacts your final returns, staying informed helps you optimise your financial strategy.

Not sure where to begin? You can also check out our Fixed Deposit option, it’s low-risk and super easy to start. In fact, you can book an FD on the Fibe App starting from just ₹1,000, instantly and hassle-free.

FAQs

How much amount of RD interest is tax-free?

No limit is specified on tax exemption in case of RD interest alone. The full interest will not be taxed when your annual gross income falls below the basic exemption limit of 2.5 lakh rupees in case of a person below 60 years. In case you are eligible, you can sign a Form 15G/ 15H to not pay TDS.

2. Is interest on FD and RD taxable?

Yes, you pay tax on the interest availed by you on the Recurring Deposits (RD) and the fixed deposits (FD). Other types of interest, whether regular and irregular, all get similar treatment under Income that is part of Other Sources in the appropriate income tax and are charged tax accordingly.