Unlike, regular fixed deposit schemes of banks, which attract tax deduction at source @ 10% by banks in case the interest income in a financial year exceeds Rs. 10,000/-, recurring deposits (RD) and other deposit or saving schemes at the post office or NSCs do not deduct tax at source. This said it does not mean such instruments are tax free in nature as the interest income has to be included in the total income of an individual as income from other sources at the time of filing the income tax return. So, the tax on such an interest income earned on RDs and other deposits (that do not deduct tax at source) shall be charged as per the income tax slab rate in which the taxpayer falls.
Recurring deposits that instill a sense of financial discipline in the depositor owing to the requirement to deposit on a regular basis offer the same rate of returns as a fixed deposit with an only difference being the amount is to be deposited in small proportions over the term of the deposit.
Also, depositors have a misconception that in case of fixed deposits of banks, wherein tax is deducted at source, investors are no longer liable to pay any other tax. On the contrary, such an interest income earned on bank fixed deposits is also to be shown and included in the total income while filing income tax return.
The only case when such fixed deposits do not attract any tax liability is when the deposit holder has no other source of income and his income is less than the threshold taxable limit. And for claiming this benefit, an investor has to file form 15G stating that his income is below the taxable limit. Senior citizens need to file Form 15H for claiming the benefit. In form 15G, depositors also need to specify the deposit account they maintain at other banks. Know about Form 15G and 15H in detail.