A recurring deposit is very similar to a fixed deposit, except one does not have to lock in the entire sum at one go. In case of a recurring deposit a fixed amount of cash has to be transferred to the account on a monthly basis for a certain period of time.
To open a recurring deposit account, one has to first open a savings bank account. Each month, money will be automatically deducted from the savings account and transferred to the recurring deposit account. If one opts for a recurring deposit of 5 years, the rate of interest that he may get is about 8.4% annually.
How is interest taxed in case of a recurring deposit?
While before the year 2015, there were no taxes charged on interest earned from recurring deposit investments, the government came up with a new rule during the financial budget of 2015-2016, that TDS (Tax Deducted at Source) would apply henceforth and 10% would be deducted from the interest that is earned on recurring deposit.
But TDS is only deducted if the interest earned is above Rs10, 000. In case one fails to submit their PAN card information to the bank, they are charged 20% on the interest earned.
In case one has a recurring deposit account and their income falls below the non-taxable income category, form 15G still needs to be submitted in case of fixed deposits as well as recurring deposits.
How can you opt for tax exemption on a recurring deposit?
In order to reduce tax payment it is best to opt for tax saving recurring deposit accounts. One simple way of saving tax payment on recurring deposit is by opening an account with the Post Office. Tax exemption is only applicable if the account has tenure of about 5 years.
The income tax is generally cleared at the end of every financial year or after the recurring deposit matures. The same applies for fixed deposit accounts. The choice is generally made by the tax payer. But, once the time of tax payment is chosen it cannot be changed.
Are taxes liable for a minor holding a recurring deposit account?
In case a recurring deposit account is held by a minor, the parents are entitled to pay the tax on the earnings.
Calculation of income on recurring deposit
For the most accurate results it is best that one uses a recurring deposit calculator, which is available on a number of bank websites. A RD calculator is simple to use and saves time.