A recurring deposit (RD) is a popular investment option for many people who want to save money regularly and earn a fixed interest rate. RD is a type of deposit account where you can deposit a fixed amount every month for a specified period and get the maturity amount along with the interest at the end of the tenure. RD is a safe and convenient way to build your savings and achieve your financial goals.
However, many people are not aware that the interest earned from RD is taxable as per the Income Tax Act. Depending on your income level, you may have to pay tax on your RD interest at the rate of 10%, 20%, or 30%. Moreover, the bank may deduct tax at source (TDS) on your RD interest if it exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens).
Therefore, it is important to know how to save tax on your RD income and maximize your returns. In this blog post, we will share some tips on how to save tax on your RD income and make the most of your investment.
Tip 1: Choose a longer tenure for your RD
One of the simplest ways to save tax on your RD income is to choose a longer tenure for your deposit. This is because the interest earned from RD is taxable in the year in which it accrues, not in the year in which it is paid. So, by choosing a longer tenure, you can defer the interest income to a later year and reduce your tax liability.
For example, suppose you invest Rs. 10,000 per month in an RD for 2 years at 7% interest rate. The maturity amount after 2 years will be Rs. 2,62,489 and the total interest earned will be Rs. 22,489. This interest will be added to your income and taxed as per your slab rate in the second year.
However, if you invest Rs. 10,000 per month in an RD for 5 years at 7% interest rate, the maturity amount after 5 years will be Rs. 7,17,517 and the total interest earned will be Rs. 1,17,517. This interest will be added to your income and taxed as per your slab rate in the fifth year.
Now, suppose your annual income (excluding RD interest) is Rs. 5 lakh and you fall under the 20% tax bracket. In the first case, you will have to pay tax of Rs. 4,498 (20% of Rs. 22,489) on your RD interest in the second year. In the second case, you will have to pay tax of Rs. 23,503 (20% of Rs. 1,17,517) on your RD interest in the fifth year.
However, if you assume that your income will increase by 10% every year, then in the fifth year, your annual income (excluding RD interest) will be Rs. 8,05,255 and you will fall under the 30% tax bracket. In that case, you will have to pay tax of Rs. 35,255 (30% of Rs. 1,17,517) on your RD interest in the fifth year.
So, by choosing a longer tenure for your RD, you can save tax of Rs. 30,757 (Rs. 35,255 - Rs. 4,498) over the period of investment.
Tip 2: Invest in tax-saving instruments under Section 80C
Another way to save tax on your RD income is to invest in tax-saving instruments under Section 80C of the Income Tax Act. Section 80C allows you to claim a deduction of up to Rs. 1.5 lakh from your gross total income for investing in certain specified instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), etc.
By investing in these instruments, you can reduce your taxable income and lower your tax liability. Moreover, some of these instruments also offer higher returns than RD and are exempt from tax on maturity.
For example, suppose you invest Rs. 10,000 per month in an RD for 5 years at 7% interest rate and earn Rs. 1,17,517 as interest income. If you invest the same amount in PPF for 5 years at 7.1% interest rate (current rate), you will earn Rs. 1,21,806 as interest income.
However, unlike RD interest, PPF interest is exempt from tax and PPF contribution is eligible for deduction under Section 80C. So, if you invest Rs. 10,000 per month in PPF for 5 years and claim a deduction under Section
80C every year up to Rs. 1.5 lakh, you can save tax of Rs. 35,255 (30% of Rs. 1,17,517) on your RD interest and also earn Rs. 4,289 more as interest income from PPF.
Tip 3: Submit Form 15G/15H to avoid TDS on RD interest
The third tip to save tax on your RD income is to submit Form 15G or Form 15H to the bank where you have opened your RD account. Form 15G and Form 15H are self-declaration forms that can be used by individuals to prevent the bank from deducting TDS on their RD interest.
Form 15G can be used by individuals below the age of 60 years who have no tax liability and whose total interest income from all sources does not exceed the basic exemption limit of Rs. 2.5 lakh in a financial year.
Form 15H can be used by senior citizens (above the age of 60 years) who have no tax liability and whose total interest income from all sources does not exceed the basic exemption limit of Rs. 3 lakh (for those between 60 and 80 years) or Rs. 5 lakh (for those above 80 years) in a financial year.
By submitting these forms, you can avoid TDS on your RD interest and claim a refund of the excess tax deducted, if any, at the time of filing your income tax return.
For example, suppose you are a senior citizen (above 80 years) and you invest Rs. 10,000 per month in an RD for 5 years at a 7% interest rate. The total interest earned from RD will be Rs. 1,17,517 and the bank will deduct TDS of Rs. 11,752 (10% of Rs. 1,17,517) on your RD interest.
However, if your total income (including RD interest) is less than Rs. 5 lakh in a financial year, you will have no tax liability and you can submit Form 15H to the bank to avoid TDS on your RD interest. In that case, you can save tax of Rs. 11,752 and get the full amount of your RD interest.
Conclusion
A recurring deposit is a good investment option for saving money regularly and earning a fixed interest rate. However, you should also be aware of the tax implications of your RD income and take steps to save tax on it.
By choosing a longer tenure for your RD, investing in tax-saving instruments under Section 80C, and submitting Form 15G/15H to the bank, you can reduce your tax liability and maximize your returns from your RD investment.
We hope this blog post has helped you understand how to save tax on your recurring deposit income. If you have any queries or feedback, please feel free to comment below. Also, don't forget to bookmark our blog for more such informative and useful articles on taxation and finance.