Recurring Deposit commonly known as RD is one of the simplest form of financial investment tool available to the public. Many of us know about RD as we have used it as an investment tool at certain time in our lives. Recurring Deposit is used create funds which are needed for future. Let us try and understand more about recurring Deposits.
What is Recurring Deposit?
Recurring Deposit is one of the safest investment tool in which a fixed amount is invested monthly for a predefined tenure and on every investment, interest is earned at a predefined rate. For Example: People can start a Recurring Deposit of Rs. 1000 for 1 year @ 9% rate of Interest. So people will be investing Rs.1000 for 12 months i.e. 12000 in a year, and on this corpus an interest of 9% will be earned. RD is the safest investment tool which gives guaranteed returns. It helps you to keep aside certain sum of money on which you can earn interest on which is higher than the interest that is earned on savings account.
Recurring Deposit is a safest financial tool and it ideal for those who are seeking guaranteed returns from their investments. Recurring Deposits is an ideal product when one is looking for short term financial needs. Short term here means period which extends from 1 year to 3 years. So Recurring deposit takes care of short term needs like:
- Annual Fees of children which are paid in one go
- Creating a fund for a international or exotic vacation
- Setting aside fund for home interior
- Funds needed for Marriage expenses,
Creating a corpus of down payment for buying a new house.
Thus looking at the above scenarios we can clearly see that Recurring Deposit will help us in achieving these objectives as Recurring Deposit provide an 8% to 10% of returns and it does not carry any risk. So when one wants guaranteed liquid returns then Recurring Deposit is the best bet.
A point to be kept in mind is that Recurring Deposits can also be used to create fund for satisfying very short term requirements like for buying a high end mobile phone, gifting tour package to near and dear ones, etc. we tend to push such needs to future but in reality all such needs and many other dozens of small needs are important and special but we rarely plan for them. So satisfying these needs can be taken care by investing in recurring deposit.
For example: Your Parents have their 25th Wedding Anniversary coming soon and you want to gift them a tour, thenthis can be done by saving into Recurring Deposit which converts your small expenditure into goals. With this, you won’t have a financial burden at one point and a wise planning of diverting a certain small sum of your money into Recurring Deposit can help you in achieving your small wishes.
The minimum amount with which you need to start investing in Recurring Deposit varies with banks. Different banks offer different schemes for Recurring Deposits. It is generally seen that the public sector banks offer opening of Recurring Deposit with a very minimal amount i.e. with Public Sector Banks including State Bank of India, Punjab National Bank, Andhra Bank, etc. investor can start a monthly Recurring Deposit with minimum amount of Rs 100. Whereas, with Private Sector Banks like ICICI, Axis Bank, HDFC Bank, etc. investor can open a Recurring Deposit with a minimum amount of Rs 500 or Rs 1000.
What is the tenure of recurring Deposit?
Recurring Deposits have a minimum tenure of one year and maximum tenure of 10 years. One can start investing into various recurring deposits of various denominations and for varied periods also. There is no restriction on the number of recurring deposit that any individual can start.
Let us now understand the tax implication on recurring deposits. Earlier before 1st June 2015, any investment done in recurring deposit did not attract any tax deductions but in the union budget of 2015 changes were brought in. Recurring Deposits from the union budget of 2015 were brought under the tax net. Recurring deposits were included under section 194A of fixed deposits and the tax treatment for it is as under:
- A tax of 10% is deductible on interest earned on Recurring deposits.
- Tax on interest would not be charged only if the interest earned is less than Rs 10000, such amount of interest is exempted from tax ambit.
- A TDS shall be levied at 20% on the interest earned if PAN information is not provided to the banks.
- The interest that is earned through saving fromRecurring deposit will be added to the total income of the individual and then the tax shall be computed depending on the income slab of the individual.
- If the amount of TDS deducted on RD interest is more than total due amount then in such case individual can claim refund on TDS paid. But if the amount of TDS deducted is less than total due amount then individual can pay the difference amount to the income tax department.
- Another way of TDS deduction on Recurring Deposit is by submitting Form 15G or Form 15H to the banks. On receipt of Form 15G or Form 15H bank will deduct less TDS or zero TDS depending upon the income of the individual that is declared in such forms. The validity of these forms is for one year. For every new financial year individuals have to again submit form 15G or Form 15H.
- Kindly note that it is very important that every individual should declare interest earned on Recurring Deposit in their Income Tax Return form irrespective of the fact that TDS has already been deducted on the interest earned on Recurring Deposits.
- Another most important point that one should keep in mind is that the limit of interest earned on Recurring Deposit is Rs 10000 per bank and not per bank branch.
As we know that the interest earned from Recurring deposits is added into the income of the individual and the tax is calculated as per the income slab of the individual. Income tax which is deducted on interest earned beyond TDS rate is dependent on the income slab of the individual which is explained as under:
|Income Tax deducted on the interest earned on Recurring Deposits|
|Income Slab of individuals||Tax Deducted at Source rate levied by Banks||Income Tax charged on the interest earned on Recurring Deposit|
|Income Below Rs 250000||Flat 10%||If the taxable income of individual is less than 2.5 lakhs and if banks deduct TDS then individuals can claim refund of Tax deducted. Another way to avoid such deduction is by submitting form 15G or form 15H to the banks. So the tax to be paid over and above TDS is 0%.|
|Income more than Rs 250000 but less than Rs 500000||Flat 10%||The tax to be paid over and above TDS is NIL as the income tax slab rate is same as the banks TDS rate. Therefore, individuals do not have to pay any extra income tax.|
|Income more than Rs 500000 but less than Rs 1000000||Flat 10%||For this income slab the TDS rate that is applicable is 10.30%|
|Income more than Rs 1000000||Flat 10%||For the income above 10 lacs the rate that is applicable is 20.60%|
Income tax department collects tax under the tax collection act for resource for all the developmental projects that the government wishes to carry out. So deducting Tax at source helps the income tax department to bring people under tax ambit. Income tax department considers collecting deducting tax very important and any defaults in this process are also taken very seriously. While tax deduction on interest earned on Recurring deposit has changed in recent times as earlier tax deduction at source was dependent on the interest earned on recurring deposit from a single branch of the bank. People used to escape from the ambit of tax as they used to open recurring deposit in various branches of a bank and thus would keep the interest earned less than Rs 10000. Nowadays, the scenario has been changed and the interest earned on recurring deposits from all the branches of a bank is added and individual’s eligibility of TDS deduction is decided. Due to this changed scenario now it has become difficult for individuals to escape the tax ambit as all the investments done in all branches of the bank is summed up and on the tax is deducted at source.
Thus above we have seen tax implication on the interest earned on recurring deposits.