Recurring Deposits (RDs) are one of the most trusted savings options for Indian investors because they allow you to build wealth slowly and consistently through small monthly contributions. They help cultivate discipline and give you a predictable way to grow your money over time.
However, what many investors often overlook is the tax treatment of RDs under Indian law, which can significantly affect the final amount you receive at maturity. If you are not aware of how RD interest is taxed, you may face unexpected deductions or confusion when reviewing your returns.
To help you plan better, here is a clear and detailed breakdown of how recurring deposits are taxed in India and what you should keep in mind.
Is Interest on Recurring Deposits Taxable?
Yes, the interest earned on an RD is fully taxable under the Income Tax Act. Every month, the amount you deposit contributes to your total savings, and the interest generated from it gets added to your total income for the year.
Unlike some small savings schemes, bank RDs do not qualify for tax deduction under Section 80C, regardless of tenure. However, a five-year Post Office Recurring Deposit allows tax benefits under Section 80C up to ₹1.5 lakh, but even in this case, the interest earned remains taxable.
Since the interest portion is what gets taxed, it is important to report this income accurately while filing your annual income tax return. Including it ensures compliance and prevents any issues during assessments.
TDS on Recurring Deposits
Just like Fixed Deposits, Recurring Deposits are also subject to TDS (Tax Deducted at Source) on the interest earned. Here’s how TDS applies:
When PAN is Provided
If you have submitted your PAN details to the bank, TDS is deducted at 10% when your annual interest earnings cross:
- ₹40,000 for regular taxpayers
- ₹50,000 for senior citizens
When PAN is Not Provided
If you have not provided your PAN, the TDS rate increases to 20%.
The same interest limits—₹40,000 and ₹50,000—are applicable even in this case.
When No TDS Is Deducted
If your annual interest income from all RDs combined is below the above thresholds, the bank will not deduct TDS.
However, this does not exempt you from paying tax—you still need to declare the interest while filing your returns.
Example: Understanding TDS and Tax Liability
Let’s say your annual income is ₹3,00,000, and you earned ₹20,000 as interest from your RD during the year. Based on your income, you fall into the 10% tax bracket, which means your taxable amount over ₹2.5 lakh results in a ₹5,000 total tax liability.
If your bank has already deducted ₹2,000 as TDS on your RD interest, you must pay the remaining ₹3,000 when filing your tax return. The bank will issue Form 16A, which reflects the TDS deducted and helps you reconcile taxes.
Forms to Avoid TDS Deduction
If your total income for the financial year is below the taxable limit, you can request the bank not to deduct TDS from your RD interest. These declaration forms must be submitted at the beginning of the financial year:
- Form 15G:
For individuals below 60 years whose tax liability for the year is zero.
- Form 15H:
For older citizens above 60 years whose total tax liability is nil.
Submitting these forms ensures that unnecessary TDS is not deducted, saving you from waiting for a refund later.
Eligibility Criteria
- You must be an Indian resident.
- Your total taxable income should be zero.
- These forms cannot be submitted by firms or companies.
No Automatic Tax Exemptions on RDs
A common misconception is that RDs automatically enjoy tax benefits because they are “savings” instruments. In reality, this is not true.
- Bank RDs are not covered under Section 80C.
- Interest earned from RDs is fully taxable according to your income slab.
- Post Office RD qualifies under Section 80C only if it has a five-year tenure, but even then, its interest portion remains taxable.
Regardless of where you open your RD, interest must be declared as “Income from Other Sources” in your ITR.
What This Means for You as an Investor
Understanding the tax implications of RDs helps you estimate your actual returns more accurately and prevents unpleasant surprises at maturity. It also helps you plan deposits better, select the right tenure, and avoid unnecessary deductions by submitting the right forms on time.
Keeping track of interest earned during the year especially if you have multiple RDs—is important for filing error-free tax returns. This ensures your savings grow smoothly while remaining compliant with tax regulations.
Conclusion
Recurring Deposits are a safe, stable, and disciplined way to build long-term savings, especially for individuals who prefer low-risk investment options. But like all financial instruments, they come with tax responsibilities that must be understood clearly.
Knowing how much tax you may have to pay on your RD interest helps you plan your finances better and set realistic expectations for your maturity amount. Stay informed, consult professionals if required, and ensure your investments remain profitable as well as tax-compliant.
