Categories: BankingFixed Income (FD,RD,PF..)

Recurring Deposit Taxes & Fixed Deposit Taxes – How do they work? (RD & FD)

I am sure most of us might have heard about one of the popular savings tool called Recurring Deposit (RD). Infact most of us might have started the investment plan with an investment in RD or Fixed Deposit (FD). These are excellent investment/saving tools to accumulate a corpus for short term goals like creating an emergency fund, creating a corpus to meet Kid’s yearly education fees, saving for big time purchases like LED TV etc., They are safe and provide guaranteed returns.

Financial products like RDs and FDs are very simple to understand and invest. Now, almost every bank provides you the option to invest in these deposits through online mode. Many banks do provide lot of innovative and flexible Recurring Deposits now (For example – ICICI Bank’s iWish Flexible RD). But, when it comes to Recurring Deposit Taxes and Fixed deposit taxes – how they work with respect to tax implications is still a big question mark (confusing point) for many of us.

In this post let us understand – Whether the interest earned on Fixed Deposits and Recurring deposits is tax free? Is recurring deposit interest is taxable or not? How are RD maturity and FD maturity amounts treated in terms of taxation? Should I pay taxes every year on RD/FD or should I pay the income tax on the maturity date of my RD/FD? How is TDS (Tax Deducted at Source) applicable on Recurring deposit (RD) and FD? Budget 2015 – Is TDS now applicable on Recurring Deposits (RDs)? How to calculate interest amount on RD and FD? Do they have any income tax benefits or exemptions?

From your Income Tax Returns point of view, it is very important to understand the below points. I have seen many investors  ignoring (or may be not aware of) the Fixed deposit taxes and Recurring Deposit taxes in their Income Tax Returns (ITR). I am sure you might have heard or seen your friend(s) receiving ‘compliance notices’ from Income Tax department for not showing these Time Deposits (FDs & RDs) in ITRs.

Tax implications on Fixed Deposits

  • There are no income tax benefits or deductions applicable for Fixed Deposits. The interest income earned on Fixed deposits is taxable. (5 year Tax saving Bank Deposit have tax exemption under Section 80c, but the interest income earned is taxable on these deposits too.)
  • Banks do not deduct TDS if the Interest income earned on Fixed Deposits is less than Rs 10,000 Rs 40,000 per year (from AY 2020-21). That does not mean this is a tax-free income in your hands. You still need to add this as ‘income from other source’ when you file your Income Tax Returns. (If the interest exceeds Rs 40,000 in a financial year, the bank will deduct 10 per cent tax before crediting the interest to the account.)
  • Interest income on your Savings Bank Account up to Rs 10,000 is tax free as per Income Tax Act 1961. Do not get confused this with the above point. Interest on your Savings a/c balance is different from the FD interest.
  • Individuals who do not have taxable income and do not have any other source of income can submit Form 15 G (or) Form 15 H (above 60 years old person-senior citizens) to their banks to avoid TDS. NRIs cannot submit these forms. If your interest income itself is above the income tax exemption limit (for a given Financial Year)then you are not eligible to submit these forms. Remember that you need to submit Form 15 G or Form 15H every year. Banks may ask you to mention the details about your other Bank(s) FDs too.
  • If your interest income on a Fixed Deposit is more than Rs 40,000 then you need to show the entire interest income when you are filling your Tax returns. If banks have deducted TDS on this income, you can capture this information in the “TDS Sheet” of your Income Tax Returns form.( Banks deduct TDS on FDs at 10 per cent only if the interest exceeds Rs 40,000 in a financial year. But your actual income tax slab may be say 30%. So, you need to pay the income taxes according to your slab.)
  • An important aspect which one needs to keep in mind is that you have to furnish your PAN (Permanent Account Number) number to the bank. If you fail to furnish the PAN number, the bank shall deduct tax at the rate of 20% instead of 10% generally applicable.

Recurring Deposit Taxes – How do they work?

  • As per the provisions of Income Tax Act, there are certain investments/deposits on which no tax is required to be deducted without any limit of the amount of such interest.  Tax is not deducted on any interest paid on any savings account or deposit in any of your recurring deposit account, be it with any bank, or Co-operative credit society or Cooperative bank.
  • Banks Deduct TDS on your Fixed Deposits but not on Recurring Deposits. “No TDS on RD is charged,” this does not mean, it is a tax free income. It’s a misconception.
  • The interest income earned on your RD is not exempted from income tax. It is taxable.
  • You need to add the interest income as ‘income from other source’ when you file your IT returns.

Latest News : The budget 2015-2016 has put RDs at par with FDs for TDS purpose. Banks will deduct Tax Deducted at Source (TDS) on Recurring Deposits too, from 1st June, 2015. Remember, TDS doesn’t end your Tax Liability.  Interest on RDs & FDs is fully taxable as income at the rate applicable to you. So even if TDS has been cut, you might have to pay more tax.

Budget 2018- 19 & New Section 80TTB

For Senior Citizens, the Interest income earned on Fixed Deposits & Recurring Deposits (Banks / Post office schemes) will be exempt till Rs 50,000 (FY 2017-18 limit is up to Rs 10,000). This deduction can be claimed under new Section 80TTB. However, no deductions under existing 80TTA can be claimed if 80TTB tax benefit has been claimed (the limit for FY 2017-18 & FY 2018-19 u/s 80TTA is Rs 10,000).

Section 80TTA of Income Tax Act offers deductions on interest income earned from savings bank deposit of up to Rs 10,000. From FY 2018-19, this benefit will not be available for late Income Tax filers.

Budget 2018-19 has also proposed to raise the threshold for deduction of tax at source (TDS) on interest income of Bank / Post office / Co-operative Bank deposits for senior citizens from Rs 10,000 to Rs 50,000 (u/s 194A). This is applicable for FY 2018-19 / AY 2019-20. (Related Article : ‘List of Income Tax Exemptions for FY 2018-19‘)

How much Income Tax do I need to pay on FD’s & RD’s interest income?

  • If your taxable income is below Rs 2.5 Lakh and banks deduct TDS (you can submit Form 15 G/H to avoid TDS), you can claim back TDS as refund in your Income Tax Returns (ITR)
  • If your income is between Rs 2.5 Lakh to Rs 5 Lakh, you need not pay any extra income tax. Because, the income tax rate of 10% matches with Bank’s TDS rate which is also at 10%.
  • If your income is in the range of Rs 5 Lakh to Rs 10 Lakh, you need to pay 10.30% beyond the TDS rate.
  • If your income is over Rs 10 Lakh, the differential tax rate is 20.60%.

When to pay income tax on my Recurring Deposit (RD) or Fixed Deposit (FD)?

Now that we are clear about Recurring deposits taxes and Fixed deposits taxes, we also need to understand when to show the interest income for paying the applicable income taxes?. Do we need to pay taxes on this income every year or when the deposit matures?

The answer is, the taxes on Bank FD (over and above the TDS amount) and full tax amount on RD can be paid either in every financial year (or) on maturity. We can choose when to pay the taxes on FD and RD on maturity, instead of each Financial Year. But, once opted (when to pay the taxes) we need to stick to the same method. (Actually in accounting terms these are known as ‘Mercantile’ or ‘Cash’ accounting methods).

Is Fixed Deposit/RD Interest Of Minors Taxable?

Sometimes, you may open FD or RD deposit account in the name of your minor kid. If you have opened a FD in your minor child’s name, you need to pay tax on the entire interest income. The income is clubbed with your income.

Another interesting point is, what happens if your child becomes a MAJOR before the FD/RD matures?

In this case, if you have been paying taxes on FD/RD every year, the RD/FD’s interest income is taxable in the your hands as long as your kid is a minor. As soon as he/she becomes a major, it is treated as his/her income. Your child is liable to pay the taxes.

If you chose to pay taxes on FD/RD maturity date, the tax liability vests on you (if your kid is still a minor), else your kid (who is a major) is liable to pay the applicable taxes (if any).

Though it is headache to pay the taxes every year, it is better to show the interest income every year in your ITR. Else, you may receive compliance notice about time deposits for FD/RD amounts (if these are not included in your ITR). (Do not get scared when you receive these kind of IT notices. You can reply to Income Tax department about the method you have chosen. But do reply to these notices.)

How to calculate the interest income on RDs ?

Banks issue/send ‘interest certificate’ or ‘TDS certificate’ on your FDs & RDs every year. So, regarding FDs you are very clear about TDS and there is no confusion regarding the FD interest calculation part also. (Most of the banks have made these certificates available online. You can visit your bank’s website and download them).

Since Banks do not deduct TDS on Recurring Deposits, they do not issue TDS certificates for RD investments. So, the calculation of the total interest income earned on your RD(s) in a given Financial year can be quite cumbersome. (Also, most of the bank offer RDs on a quarterly compounding basis).

I suggest you to visit the below links to calculate the RD interest income.

  • RD calculator (Corporation Bank website) (This RD interest calculator considers investment in BEGIN mode. Lets say you book RD on a monthly basis, then it is assumed that the investments are made in the beginning of every month.) (You need to deduct the total invested RD amount from total maturity amount, to get the interest amount for a specific period.)
  • Freefincal.com

When do you pay FD/Recurring deposit taxes? Do you show the FD/RD interest in your Income Tax Returns (ITR) every Financial year? Do share your views and comments. Cheers!

Continue reading :

(Image courtesy of hin255 at FreeDigitalPhotos.net) 

This post was last modified on July 10, 2023 6:18 pm

Sreekanth Reddy

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 14 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. The information provided, therefore, should not be viewed as financial, legal, accounting, tax or investment advice."

View Comments

  • Hi Sreekanth,

    I'm a foreign national on a long term student visa and do not have any income here.

    1. How much maximum interest I can earn per year from FDs or RDs without having to pay any taxes?

    2. How much maximum interest I can earn per year from regular savings account without having to pay any taxes?

    3. Would these 2 amounts be considered separately or would they be added?

    • Dear Marek,
      1 & 2 - Up to Rs 2.5 Lakh, but banks can deduct TDS and you can file income tax return and claim the REFUND of TDS (if any).
      Both would be added under the head 'income from other sources'.
      Kindly note that interest income on Saving account up to Rs 10,000 is tax-free.
      If interest earned is more than 10,000 then balance amount will be taxable as before i.e considered as Income from Sources and taxed as per your slab rate.
      Read : Latest income tax rates FY 2017-18.

      • Thanks Sreekanth,

        Something is still not clear for me in your answer.

        You say: "1 & 2 – Up to Rs 2.5 Lakh", which means that for Savings account (that's point 2) the tax-free interest income would be 2.5 Lakh and at the same time you say : "interest income on Saving account up to Rs 10,000 is tax-free"

        Can you please clarify.

        • Dear Marek,
          The basic exemption limit is Rs 2.5 Lakh, so any income which is below this limit is tax-exempt.
          In case if the interest income on FDs/RDs/Saving account is above Rs 2.5 Lakh it's taxable income.

          • Thanks again!

            I must say you have an excellent website covering so much useful information.

            I have another question which I'm not sure where to post, so I'll ask it here if you don't mind.

            Do the foreign nationals on a long term student visa and long term residence permit have to file the tax report to ITD over their assets (bank accounts, investments, properties etc.) that they own in their home countries?

          • Dear Marek,
            If you have taxable income in India, when filing your taxes you need to report / declare your Foreign Assets & liabilities in Income Tax Return form.

          • Dear Sreekanth,

            Thanks very much for all your great answers. I am similar to Marek, above, same kind of visa and living in India long term--no work, only a small interest income. In 2009 I had one year when I had taxable income in India from an FD. But I then moved that money back to my home country and since then I have had only a few hundred rupees interest annually on my Savings account. This year I received a compliance message from the Tax Dept asking if I had any taxes to pay, and asking that I file a tax return.

            However, when I go to my online account of the Indian Tax website, there is no mention under issues pending for me to answer any question about why I have not paid any taxes. So I cannot reply to their query about not paying any taxes there.

            I am hoping not to have to file a Tax return as I have no future plans to have any taxable income in India for the rest of my life and would prefer not to have to start filing a tax return every year going forward.

            Thanks very much for your insight!

            James

          • Dear James,
            You can a raise a ticket @ e-Nivaran portal quoting your notice details, you may ask the IT dept to provide more details on the compliance notice and the possible resolution.

  • Hi Sreekanth,

    I am looking for a short term investment plans to settle my Bank Loan (5L)

    I don't have any investments and savings till today, but now I would like to open RD or FD to repay my Loan ASAP. So that I can start saving money for my future.

    Also, I started to earn more from last month. Now I am planning to settle down all my debts and to save my tax

    Please advise.

  • Hi

    I am planing to sell my flat owned by me and my husband.

    I request your guidance on the following :

    1. How to get the payment ? Would it be exactly 50% each ?
    2. If I wish to receive 100%, then any clause in the sale deed could be included where my husband's consent could suitably worded ?
    3. I need some assistance on arriving at capital gain and the corresponding tax that we need to pay. Would you be able to give this support ? If so, please let me your contact details.

    Thanks
    Choodamani

  • DEAR SIR,

    WISH YOU A VERY HAPPY NEW YEAR. AGAIN I AM DISTURBING YOU.

    I MADE SOME FD IN THE NAME OF MY MOTHER (AGED ABOUT 70 YEARS) AND ACCORDING TO YOU THE MATURITY AMT. IS TAXABLE IN THE RESPECTIVE FY.

    AM I RIGHT? LOOKING FOR YOUR EARLY REPLY.

    • Dear KAUSHIKI,
      Happy new year to you too :)
      In fact, it is accrued interest. For ex : if you book 3 year FD, then every year interest gets accrued, which can be declared in ones Income tax return. Bank also issues TDS certificate based on which you can disclose the income.

  • Hi Sreekanth,

    Please clarify my doubt, I had done Tax saving FD (5 yrs lockin period) on Jan 10th 2017, So can i claim it under section 80C for year 2016-2017 is this get eligible ? or do i need to wait to claim this for next year (2017-2018)

    Thanks,
    Abhijith

    • Dear Abhijith..You can claim the tax deduction in FY 2016-17.
      (Financial year 16-17 is from 1st April,2016 to 31st March, 2017).

  • Hi,

    I have a RD(for 57 month) 2000 per month since April-2012, now it will mature in Jan-2017 with amount 142000. Please let me know TDS is applicable or not as it was introduced from April-2015.
    As per my understanding, principle amount should be considered as amount till March-2015 and then Interest on this amount should be considered for TDS.

    Please confirm.

    Thanks
    Manoj

  • Hi ,

    I come under 20% Tax Slab limit. I had given 15 G signed to some banks & because of that they didn't deduct TDS on my FDs even though interest earned is more than 10K. I can see the details now from 26AS.

    1. Is it OK to pay the Tax now & show it in ITR returns.
    2. Is there any way to cancel the 15G signed which I had handed over to bank..

    Thanks,

  • Sir,
    I have an FD of rs1,00,000 in a bank. For AY 2014-15 TDS rs1,202 was deducted but at that time i didn't knew what was TDS. Can i claim its refund now.

    • Dear Abhishek,
      Did you check the intimation sent by the IT dept specifying the sum determined to be payable by, or the amount of refund due to, the assessee (u/s 143)? If so, you can file rectification return and claim the refund.

      • Sir,
        My income is below 2.5 lakhs and I don't file returns. I came to know about tax deduction only 2 weeks back.

        • Dear Abhishek
          In one financial year you can file your IT Returns for previous 2 financial years. For example – in the FY 2016-17, up till 31st March 2017, you can file return for the previous 2 financial years 2015-16 and 2014-15. So, ITR of FY 2013-14 can't be filed now.

  • Sreekanthji...i had a quiries..
    Suppose my income is 4 lakhs/annum than i eligible to pay tax on rest 1.5 lakhs. And suppose i start a RD for 5 years whose matured value is 7 lakhs 20 thousands. Now my question are as below.
    question no. 1: So i am liable to pay Rs.15000 as income tax.if i have 30 thousands insurance coverage by LIC than how much tax i have to pay?
    Question no 2: Bank will deduct 10% TDS on matuirity value or yearly basis if interest income exceeds 10000 per year?. Now the fact is for RD bank will give interest on matuirity -than how do i understand that what is the yearly interest generated?
    Question no 3: If bank will deduct 10% TDS on RD which is more than my calculated income tax than how do i get return my extra deducted money?
    Question no. 4: If Insurance coverage is more than deducted TDS & income tax -than what should i do? Also if i opened PPF a/c than how do i use its benifit on income tax.

    • Dear Suman,
      1 - Kindly use this tax liability calculator, click here..
      2 - TDS is deducted on Yearly basis, based on that you can find out the total interest amount credited on such deposit.
      3 - You can file your income tax return, provide the TDS details and claim the extra TDS amount (if any) as REFUND.
      4 - You can claim life insurance premium amount and PPF contributions as tax deductions u/s 80C. This will reduce your tax liability.

  • Dear Sir,

    Please inform me,
    I have a Postal RD account amounting 8000 (Eight thousand) per month .
    opening date -may-2014. Now the accumulated principal amount is growing year wise, so interest al so increase. So please conform now, I have to submit form 15G or Not required.

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Sreekanth Reddy
Tags: FDFD taxesFixed DepositsFY 2018-19 Section 80TTBinterest income on recurrind depositis RD interest taxableLatest post office interest ratesPopular Investment OptionsRDRD interest in ITRRD on minorRD taxesRecurrind depositstaxes on RD maturityTDS on RDTDS on recurrind deposits
July 10, 2023

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