Recurring Deposit (RD) Taxes And Fixed Deposit (FD) Taxes: How Do They Work?

Money investment is always considered a big risk or a leap of faith. There are many schemes wherein you can invest. But, these schemes are not much reliable. Market fluctuations are guiding your investment. So here, we will be talking about 2 of the most secure investment schemes. Your banks provide these schemes. They don’t fluctuate. The rate, once decided, doesn’t change. They are risk-free. These are Fixed Deposits and Recurring Deposits. But, many times, people get convinced that these are not taxable. This is grave ignorance. People get stranded with their profits due to this fact. So we will deal with Recurring Deposit (RD) Taxes And Fixed Deposit (FD) Taxes in this article.

Recurring Deposit (RD)

Recurring Deposit or RD is a scheme for salaried employees. Under the said scheme, the customer has to deposit a certain amount of cash every month. This period is decided at the start.

Then, he/she would receive an interest in the deposited sum. The process is simple, with a few formalities included. The person has to open a Recurring Deposits bank account in the bank where he/she has a savings account.

There is a fixed amount to be deposited every month. This amount would be transferred to your RD account. After the time is over, the principal amount and the interest are returned. RD lets the investors invest small amounts for a long time and save money.

RD rates offered by various banks are competitive. The rates revolve around 6-8% for around 7-10 years on average. This is why it is most suitable for salaried employees. They can be initiated with deposits as low as Rs 10.

The Interest on RDs are calculated with the help of the following formula:

• M = R[(1+i)^n-1]/(1-{1+i}[-1/3])
• M = Maturity Value
• R = Monthly Installment
• n = Number of Quarters
• i  = Rate of Interest/400.

For opening up an RD, you will need to provide an Address Proof and Identity proof. The address proof can include telephone, electricity, government cards, etc. Voter ID, PAN, etc. come under identity proof.

For people who are to invest for the first time, this is a safe option. There are no market risks. It is a very stable form of investment.

Taxes On Recurring Deposits

Like any investment interest earned, the interest in this is taxable. When filing ITRs, you will have to fill your interests earned under “income from other sources.” Even if you are exempted from taxes, you have to do so.

The rate of TDS has been set at 10% if the returns exceed INR 10,000. TDS is the tax deducted at the source of income. RD interests earned are subject to these TDS deductions.

TDS is commonly called income tax, which is applicable under the Income Tax Act of 1961. These laws stay the same except for minor changes every year. As per the rules, if your interest earned is above Rs 10,000 then, it is taxable. This is the rule that every investor has to follow.

The money invested will be a part of the yearly income the person earns. All the interest received by him will be taxable under the TDS system. The tax will be applicable at the prescribed rate if interest exceeds 10,000 INR. In the case of errors on your part, you will receive the ‘compliance notice’ for not showing deposits in their ITRs.

Fixed Deposited Or FD

Fixed Deposit is a popular investment method. But, people are not much familiar with the taxes associated. It is a scheme of private and government banks. You can deposit money at higher interest than a typical savings account.

Similar to RD, you can withdraw money before maturity, but after paying penalties. You can also ask for a monthly payout of interest. This type of investment is more beneficial for senior citizens. If you deposited once, another account is needed to deposit more.

Also, recommencing an FD is simple. This method of investment is very safe. Some banks offer great rates to senior citizens.

FDs are more in use than RDs. You have to open a special FD account. FDs are a safe option with guarantees included.

Taxes On Fixed Deposits

Fixed Deposit returns are subject to TDS at the time of maturity.

For residents of India, the TDS on FD would be at 10%. This condition is applied only when interest earned is greater than INR 40,000. For depositors with no PAN, rates are different. For non-residential Indians, the TDS rate would be 30%. Also, additional charges could be applicable.

If you fail to show this in your ITR, you will be notified by the Tax Department of the government. This is the same as in the case of RD. The tax will be deducted directly from the source.

For NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) FDs, no tax is applicable. They are tax-free. For seniors citizens, no TDS is deducted till their interest amounts to INR 50,000.

It should be noted that the method to deposit these taxes is important. You can choose to deposit every month or all at once. But, you will have to stick with a single method. You can’t change it.

There is often a misconception that having multiple FDs in multiple banks can save taxes. Earlier, these rules applied to a single branch. But now, all the interests across all banks and branches are checked. If all your interests are above Rs 10,000, you will pay TDS.

RD/FD Taxes: Major Things to Remember

1. There are many situations wherein these investments are made in a minor’s name. If such is the case, you have to pay interest on the entire interest received. The TDS is applicable here too. It is then deducted from the income of the parent/guardian. The taxes come in the name of the parent/guardian.
2. If the minor turns into a major before the FD/RD matures then, the situation changes. The parent is only responsible until the child is minor. Thereafter, the tax is deducted at the source, i.e., his income.
3. Although, the parent can pay the TDS himself till the maturity date. He can tell the respected authorities. After payment, you should fill your ITRs on time. This ensures that no miscommunication takes place.
4. There are many cases where the holder cannot show a valid PAN card. In such cases, the TDS rate becomes 20%. The higher TDS rate is to direct people to apply for PAN cards. It represents your financial self.
5. Similar conditions are applicable to the spouse. You can’t save yourself from taxes by using your family. The tax would still come in your name. If you fail to act, you will receive the “compliance notice.” If the bank deducts TDS at 10%, but you come under the 20% or 30% slab, you will have to pay the reso. There is no exemption in any case.

When Can You Be Exempted From FD And RD Taxes?

If you receive an FD interest less than INR 40,000, you are not liable to pay TDS. If you are an Indian, you can apply for a TDS waiver. Form 15G and 15H, available as per age, should be filled. These forms mean you have declared your total income for the financial year to be NIL. Hence, no TDS is detected as your income is NIL.

NRIs cannot submit such forms. Also, if your income is above the TDS exemption limit, you are not eligible for submission. You will have to show your full income in the ITR. In the case the income interest is non-taxable, form 15G is to be filled. This is applicable for FD, and RD. Form 15G is mandatory to save legal taxation of the interest earned.

There is a great difference between Forms 15G and 15H. 15G is for people under 60 years of age. On the other hand, Form 15H is for people above 60 years of age, i.e., senior citizens. This is to be taken care of in cases of tax-exemption.

There also exists a form 16A. This is the form wholly filled by the person or organization that employed you. This employer deducts TDS, and hence, he is eligible to provide you this. This form is provided regardless you want it or not.

Let’s consider your annual income is Rs 3,00,000, and you earned Rs 20,000 as interest. Since no tax up to Rs 2.5 lakhs, you will be liable to pay tax on RS 50,000. Then, 10% is the rate of tax. Thus, a TDS of 2,000 Rs would be deducted.

When the bank deducts this amount, you will be given a certificate. This certificate proves that you have paid your TDS.

Decide Which Is Better?

If you will look at the longer run, FD gives you a better return. For example:

Consider you have invested Rs 24,000 in an FD and Rs 2000 per month in RD. Consider the rate is 9% interest quarterly. The total interest earned through FD would be Rs 2234. The total interest earned through RD would be Rs 1195.

Thus, there will be a difference of 1039 Rs. Hence, you can say FD is the better option. Though it would help if you remembered, TDS is applicable in both cases.

Hence, to conclude, FD and RD are the safest options for investing money. They are reliable, resource, and easily available. They can be considered hassle-free. In the long run, they can be very beneficial.

You should consider investing money in the said schemes. Though paying taxes shouldn’t be forgotten. The government has the right over any and every dime you earn. There’s no rule as to who should invest. Everyone has an equal right to do so.

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