Is RD Helpful for Income Tax Declaration Under 80C to Save Tax?

Recurring deposits are a popular savings instrument offered by banks and post offices. As the name suggests, a recurring deposit is a monthly investment locked in for a certain period that earns a fixed interest rate. A recurring deposit (RD) is an excellent tool to save and invest consciously from your monthly earnings. The interest is compounded quarterly, and the returns are guaranteed. Opening an RD account is simple; and you can view your balance using internet banking. Since banks and post offices are under the government’s purview, your money is safe in a recurring deposit. Given these benefits, RDs are favored by risk-averse investors. However, investments in RD offer no tax benefits. You cannot avail of 80C tax exemption on recurring deposits. 

Tax exemption on RD

As an investor and taxpayer, when you invest in specific schemes, you receive a benefit in the form of tax deductions. Under Section 80C, you can claim tax deductions of up to Rs. 1,50,000 if you invest in specific schemes like ELSS, PPF, NPS, ULIP, and NSC. The investment amount is deducted from your gross taxable income, reducing your tax payable. However, there is no tax exemption under Section 80C for recurring deposits.

Income tax on interest earned on a recurring deposit (RD)

The interest on recurring deposits is compounded on a quarterly basis. You receive the interest and principal on maturity. The interest earned on recurring deposits is not tax-exempt; it is added to the overall income for tax calculation. The income tax payable is calculated based on the income tax slab you fall under.

Banks and other financial institutions deduct a tax at source known as TDS on interest income above a specific limit. The TDS rate varies depending on whether or not you submit your PAN card to the bank. Recurring deposits, too, are subject to a TDS as per the limits below: 

• When you submit your PAN card, a 10% TDS is deducted on interest income above Rs. 10,000. This limit is higher at Rs. 50,000 for senior citizens. If the interest earned is below the limit, banks will not deduct any tax, and the full amount is credited to your account.
• If you don’t submit your PAN details to the bank, a flat 20% is deducted as TDS for interest above Rs. 10,000. The limit is Rs. 50,000 for senior citizens. 

Tax on Post Office 5-year RD

 Post offices also offer a recurring deposit scheme for a tenure of five years. A post office RD can be opened with a minimum contribution of Rs. 100. You can deposit Rs. 100 minimum in the account every month and in multiples of Rs 10 above the minimum. The current interest rate of a post office RD is 6.5%. There is no Section 80C tax exemption on recurring deposit investments done with the post office. The interest is added to your taxable income. There is a TDS applicable on the interest accrued every year. The post office deducts 10% of interest income if it exceeds Rs. 40,000, and the PAN card is on the record. However, the deduction is 20% if PAN card details have not been disclosed. The limit is Rs 50,000 for senior citizens.

Final Thoughts

A recurring deposit is a simple, risk-free savings tool that offers guaranteed returns. It is easy to set up and operate at any bank or post office near you. You can allocate a portion of your earnings for regular monthly savings. However, there is no tax benefit on recurring deposit contributions. The income from RD will be taxed basis of your income tax slab. Keep these features in mind when you open an RD account.

FAQs

 1) Does a recurring deposit have any tax exemption?

 No, recurring deposits do not have any tax exemption. The interest is added to your taxable income, and there is a TDS applicable on the interest accrued every year.

2) How much of RD interest is tax-free?

The interest from RD is added to your overall income and taxed as per your income tax slab. TDS is deducted for interest amounts above Rs 10,000 in a financial year at 10% if PAN details have been made available.

3) Is RD investment covered under Section 80C exemption?

No, there is no tax exemption under 80C for recurring deposits.

 4) What is the TDS for RD interest?

On the interest amount above Rs 10,000, a TDS of 10% is deducted; the limit is Rs 50,000 for senior citizens. If you have not furnished your PAN card to the bank or post office, the TDS rate applicable is 20%.

5) Is Post Office RD better than a bank RD for tax saving?

A post office RD and a bank RD have the same tax rules. There are no special tax concessions available on post office RDs.

6) What are the benefits of a post office RD?

Post office RDs have a tenure of five years, which you can further extend by five years after filling out an application form. A post office RD offers an interest rate of 5.8%. A year after account opening, you can avail of up to 50% of the balance credit in your post office RD account as a loan.