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. But, this provision will be amended soon.
The budget 2015-2016 has put RDs (Recurring Deposits) at par with FDs (Fixed Deposits) for TDS (Tax Deducted at Source) purpose. Banks will deduct TDS on Recurring Deposits (RDs) too, from 1st June, 2015.
If you receive more than Rs 10,000 as interest from your RDs, your bank will deduct Tax and directly pay this tax to the Govt of India (on behalf of you). You will receive TDS certificate (Form 16 A) from your bank.
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, depending on your income tax slab.
Income Slabs – TDS on Recurring Deposits – Income Tax beyond TDS rate
What is the additional income tax rate that you need to pay over and above the TDS? This is dependent on your income tax slab.
- 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 of 20.60% needs to be paid.
Important points to be noted ;
- 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 interest income on a FD / RD.
- The rate of TDS deducted by banks is 10% on interest income, provided your PAN number is available with the bank. If the bank doesn’t have your PAN in its records, TDS is deducted at 20% on interest income.
- This limit of Rs10,000 is per bank (not per bank branch).
Read my article on “Recurring Deposit Taxes & Fixed Deposit Taxes” for a detailed explanation on various aspects of RD & FD taxes and how they work.
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