Recurring deposits (RDs) are a popular choice among individuals, offered by banks and financial institutions to help them save and earn interest regularly over a fixed term.
Although RDs offer a convenient way to save money, it's important to know how taxes impact the interest earned from these deposits. This guide will help you understand the tax on recurring deposits and much more.
TDS on recurring deposit
A recurring deposit (RD) is a term deposit account that allows you to make regular deposits over a set time to earn interest. RDs are an investment tool that can help you save money and reach financial goals. They can be a good option for conservative investors who prefer guaranteed returns over riskier investments.
Recurring deposit schemes, like other tax-saving and investment strategies, are taxed. If the total interest collected on a recurring deposit reaches Rs. 10,000 in a fiscal year, a 10% Tax Deducted at Source (TDS) is levied.
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Tax on RD interest
Kotak811 recurring deposits (RDs) are taxable as per the individual's income tax slab rates. The bank deducts a tax deducted at source (TDS) of 10% if the interest earned per year exceeds Rs. 40,000 (Rs. 50,000 for senior citizens). However, RD interest is not taxed if the amount earned is less than or equal to Rs. 10,000. The 10% TDS is only applicable if PAN details are provided, otherwise, the bank deducts TDS at 20%.
Process to claim a refund if TDS is deducted but total income is below the taxable limit
If the tax deducted from your income doesn't match the actual amount you owe, you can calculate your taxable income and the correct tax amount, then file an income tax return (ITR) to claim a refund for the overpaid tax.
While filing your ITR, you'll need to enter your bank name and IFSC code. This information helps the tax department to process and refund the excess tax directly to your bank account.
If your employer deducts more tax than you owe:
If your taxable income is less than the basic exemption amount, you can avoid TDS deductions on your pay.
If the tax you owe is less than the TDS deducted, you need to file an Income Tax Return (ITR) to claim a refund for the excess TDS.
When completing your ITR online, include your bank account information and IFSC number so that the Income Tax (IT) department can process your TDS refund.
TDS Deduction on recurring deposits:
If your taxable income is less than the basic exemption level, you can notify your bank at the start of the fiscal year that you have no taxable income by submitting Form 15G. This will prevent any tax (TDS) from being deducted from your interest income.
If the bank continues to take TDS on your interest income despite obtaining Form 15G, you can request a refund by completing your Income Tax Return (ITR).
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For senior citizens with fixed deposit accounts:
Senior citizens aged 60 or above are exempt from tax deductions (TDS) on interest earned from bank deposits, provided the interest from each bank does not exceed Rs 50,000 annually.
You can submit Form 15H to your bank at the start of the financial year to indicate that you don't have a taxable income if your interest income exceeds this limit but your total income (after deductions under section 80) is below the basic exemption limit.
If the bank still deducts TDS on your interest income despite receiving Form 15H, you can claim a refund by filing your Income Tax Return (ITR).
About Form 15G, 15H, and 16A
Form 15G: Form 15G is a declaration that fixed deposit holders who are under 60 years old and Hindu Undivided Families (HUFs) can submit to avoid TDS deductions on their interest income for the fiscal year. This form is provided under Section 197A of the Income Tax Act of 1961.
Form 15H: Form 15H is a self-declaration form that senior citizens aged 60 or above can submit to avoid TDS on interest earned from fixed deposits (FD) and recurring deposits (RD). This form is regulated under Section 197A, Subsection 1C of the Income Tax Act of 1961.
Form 16A: Form 16A is primarily used to show the details of tax deducted at the source (TDS) on income other than wages. The entity that deducts the TDS issues Form 16A as a certificate to the individual or entity from whose the tax was deducted.
Common mistakes made by individuals
Here are some common mistakes made by individuals:
- Many investors forget to include the interest earned on RDs in their annual income while filing their Income Tax Returns (ITR). They must keep a record of the interest earned from all RDs throughout the year.
- Investors often assume that no RD rate tax is due if TDS is deducted, or they might be unaware of the current TDS rates and thresholds. TDS is deducted at 10% on interest over Rs. 40,000 (Rs. 50,000 for senior citizens) in a fiscal year.
- Eligible individuals (those with total income less than the taxable limit) sometimes fail to file Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to avoid TDS. Check your eligibility for submitting Form 15G or Form 15H at the beginning of the financial year and submit the appropriate form to your bank to ensure TDS is not deducted if you are eligible.
Conclusion
Today, nearly every well-known bank provides an online Recurring Deposit service. This convenient option allows individuals to deposit funds into their RD account, close the account, check transactions, and update personal details- all from the comfort of their home, at their preferred time, without needing to visit the bank during regular hours.
If you wish to apply for a recurring deposit, you can do the same in a few simple steps. You must check the recurring deposit fees & charges before investing in an RD.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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