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Tax Benefit of Recurring Deposit (RD)

June 17 , 2013

A lot of people seem to be under the impression that interest on Recurring Deposit is tax free. However the fact is different. You very much need to pay income tax on interest income from RD.

Tax benefit of RD- no TDS

The reason behind the misconception could be the no-TDS status of recurring deposit. Tax is not deducted at source on interest from RD but it does not make it a tax-free source of income.

So the only tax benefit of recurring deposit is that there is no TDS on RD interest. This is good for retirees and others whose total income is below taxable limit because if TDS were there then tax would be first deducted from the interest income and they would have to claim it back by while filing returns.

Paying tax on recurring deposit

Hardly anyone might be eager to learn about this but since TDS does not apply you are liable to pay up tax by yourself, provided your income exceeds the taxable income. You need to declare interest income from RD in your ITR form while filing returns and pay tax at the rate of your tax slab.

As regards to when you are to pay tax on recurring deposit interest, whether on maturity or every year, the tax rules leave it you. We suggest that if lump sum interest at maturity is likely to bring your total income in the taxable bracket you pay interest on accrual basis, that is, every year.

Tax on other deposits

For the sake of comparison, interest income from Fixed Deposit (FD) is also taxable, except in case of 5 year tax free FDs. Moreover TDS applies on FD interest over Rs 10,000 a year. Wish the government allowed tax rebate on recurring deposit as well like 5 year FD but there is no such benefit as of now. Interest from savings deposit is exempt up to Rs 10, 000 a year.

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