Recurring deposit is a type of deposit where small contribution is made on regular basis towards the deposit till the end of the tenure. The amount will be deducted from your savings bank account towards your recurring deposits.
Let us say that you plan to save Rs 5000 every month from your salary. You can deposit the same in a recurring account, which is than deducted from your bank account on a specific date. The amount that needs to be deposited, the time frame and the date is determined by you, while the interest rate is determined by the bank.
Interest rate applicable
The interest rate applicable is at par with bank fixed deposits depending on the tenure. The minimum tenure is for 1 year. So, for example, if you plan to open a recurring deposit in State Bank of India, and the term deposits attract an interest rate of 7% for 1-year you would get the same amount of interest on your recurring deposit.
Tax on recurring deposit
Yes, the interest income earned from recurring deposit is taxed as per tax slabs applicable on the person.
Let's say you have a recurring deposit, wherein you deposit a sum of Rs 20,000 each month. Now, on this if you earn an interest of Rs 12,000, it needs to be added to the total income to compute your tax liability.
TDS on Recurring deposits
Tax deducted at source was introduced in RDs from Union Budget 2015. Now, if you earn Rs 12,000 as interest each year, the bank would deduct 10% of the interest earned, which means you would end-up paying slightly more then 10 per cent, because of other levies. It's important to remember that interest is not on the excess amount over and above Rs 10,000, but on the entire amount.
How to avoid TDS on recurring deposits?
1) One can open fixed deposit in the name of the family such as wife, parents etc., whose income is NIL or below the tax slab.
2) One can also consider opening Rds in different banks. Note that opening RDs in different branch will not help. Make sure interest earned is not above Rs 10,000 in a single bank. We wish to emphasize that it will only save TDS. You must add the interest income to your total income and pay tax accordingly. The article is to save TDS and not to avoid tax.
3) Investors whose income is below the tax slabs can avoid TDS by submitting Form 15G and senior citizen can submit Form 15H.
4) Individual investors who have NIL income can claim refund by filing tax return for that particular year. For this one needs to add TDS certificate as proof of TDS deducted.
5) Investors can avoid TDS on RDs by investing in Post Office Recurring Deposits as they do not attract TDS.
Who Should Invest In Recurring Deposit?
Individuals in the lower tax bracket or below tax bracket can consider investing in recurring deposit. Investors who are looking to contribute on monthly basis to invest for a future need. Recurring deposit is a great disciplined approach for the investment to bear fruit for beginners.