Is interest on recurring deposits or RDs taxable in India?

Interest on all of the fixed deposits in India is taxable and the only place where interest is not taxable are the tax free bonds and interest earned from the Public Provident Fund (PPF) in India.

So, are recurring deposits taxable?

Most certainly it is. What this means is that the interest rates from these deposits would have to be added to the total income and tax computed accordingly.

So, let's give you an example. Let's say you have a recurring deposit, wherein you deposit a sum of Rs 20,000 each month. During the course of the financial year, if you earn an interest of 12,000 then these would have to be added to the total income to compute your tax liability.

This means if your salary income is Rs 4 lakhs, then you must also add interest from all your Fds to the total income, including the interest from recurring deposits. Say, if you have only Rs 4 lakhs as salary and Rs 12,000 from your recurring deposits then your total income would be Rs 4.12 lakhs. So, your liability would be on a total income of Rs 4.12 lakhs and not on the income of Rs 4 lakhs.

So, does it make sense to invest in Rds?

Well, it all depends on a few things. Say, you want to save for a car that would cost Rs 2.4 lakhs two years down the line. Then it would make sense to see if you can invest every month a sum of Rs 20,000 for the next 12 months. A disciplined approach is necessary before one considers investing in a recurring deposits, as you do not end-up paying one month and skipping the next.

If you are in a very high tax bracket of 20 and 30 per cent, then recurring deposits would pose a serious tax liability challenge.

Therefore, in short it would depend on your own requirement as to whether you want to opt for a recurring deposit.

Conclusion

Among the few advantages of a recurring deposit is that it is a great systematic way to invest for a future need. As mentioned earlier it needs a great disciplined approach for the investment to bear fruit. Go for it if you are not in a very high tax bracket, as it is one of the simplest of financial instruments to understand.

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