Tax-smart Investing: How Recurring Deposits Fit Into Your Financial Plan
Recurring Deposits (RDs) are a preferred investment choice for individuals looking to save systematically while earning assured returns. They provide a disciplined approach to accumulating wealth, as investors deposit a fixed sum every month and receive interest on the growing balance. However, while RDs are considered a safe and stable investment avenue, it is essential to understand their tax implications. The interest earned on these deposits is taxable, and depending on the total income, investors may be subject to Tax Deducted at Source (TDS). This article delves into the taxation aspects of RDs, TDS applicability, and ways to manage tax liabilities effectively.
How Interest on Recurring Deposits is Taxed
The interest earned on RDs does not enjoy any tax exemption and is classified under the category of ‘Income from Other Sources’. This means that investors must declare the interest income in their income tax returns and pay taxes according to their applicable income slab. Unlike some tax-saving instruments, RDs do not qualify for deductions under Section 80C of the Income Tax Act, making it important for depositors to plan their investments wisely to minimise their overall tax burden.
Tax Deducted at Source (TDS) on RD Interest
The taxation of RDs includes a TDS component, wherein banks deduct tax at the source if the total interest earned crosses a specific threshold in a financial year.
- TDS Applicability: If an individual’s interest earnings from RDs exceed Rs 10,000 in a financial year within a single bank, TDS will be deducted. For senior citizens, the threshold is higher, set at Rs 50,000.
- TDS Rate with PAN: If the investor has provided their Permanent Account Number (PAN) to the bank, the TDS rate applicable on interest exceeding the threshold is 10%.
- TDS Rate without PAN: If PAN details are not submitted, the TDS deduction increases to 20%, making it imperative for depositors to ensure their PAN is updated with the bank to avoid higher deductions.
From April 1, 2025, the government has introduced revised limits for TDS deductions, benefiting both senior citizens and general taxpayers.
- The exemption limit on TDS deductions for interest income has been increased from Rs 50,000 to Rs 1,00,000 for senior citizens. This means banks will now deduct TDS only if their annual interest earnings exceed Rs 1 lakh.
- For general investors, the TDS exemption limit has been raised from Rs 40,000 to Rs 50,000. If their interest earnings remain within this new limit, no TDS will be deducted.
Avoiding TDS Deductions with Forms 15G and 15H
Individuals whose total annual income falls below the taxable limit can prevent TDS deductions by submitting self-declaration forms to their bank.
- Form 15G: Applicable to individuals below 60 years of age, this form declares that the investor’s total income does not exceed the basic exemption limit, thus preventing TDS deductions on RD interest.
- Form 15H: Designed specifically for senior citizens, this form ensures that banks do not deduct TDS if their total income remains below the taxable threshold.
TDS vs Final Tax Liability
It is important to distinguish between TDS and the actual tax liability on RD interest.
- TDS is a tax deducted in advance by the bank, but it does not necessarily cover the investor’s full tax obligation. If the individual’s total income falls within a higher tax bracket, they may be required to pay additional tax when filing their income tax return.
- Conversely, if the TDS deducted is higher than the actual tax liability, investors can claim a refund when submitting their tax return.
How to Reduce Tax Burden on RD Investments
While RDs do not offer direct tax-saving benefits, investors can adopt certain strategies to manage their tax liabilities effectively:
- Submitting PAN to the Bank: Ensuring that the bank has the depositor’s PAN details helps in keeping the TDS rate at the lower threshold of 10% instead of 20%.
- Utilising Form 15G or 15H: Eligible individuals should make use of these forms to prevent unnecessary tax deductions.
- Spreading Deposits Across Banks: Since TDS thresholds are applicable per bank, investors with large deposits can consider distributing their investments across different banks to stay below the TDS limit.
- Exploring Alternative Investments: Tax-saving instruments such as Public Provident Fund (PPF) or tax-saving Fixed Deposits (FDs) under Section 80C can be used to optimise tax efficiency.