Mr. Rajeev is an employee of a well-known private company. He earns a reasonable salary and is looking for a safe option to invest and get some good returns. He does not have a lump sum amount at his disposal so he cannot open a Fixed Deposit account. Instead, he decides to open a Recurring Deposit (RD) account.
Rajeev looks forward to earning some good returns from his Recurring Deposit. In the meantime however, he comes to know that RD accounts are liable for TDS deduction as per the Union Budget 2015. He wonders how much TDS will be deducted on his RD account and if there are any circumstances under which he won’t be taxed at source.
Well, just like Rajeev, many of us probably aren’t aware of the rule under which RD accounts will be subject to TDS and would like to get a better picture of things. So, we’ve decided to explain the whole process to you to help you understand better how TDS is deducted on RD accounts.
What is TDS?
Tax Deduction at Source (TDS), as the name suggests, is the collection of revenue at the very source of income. It is an indirect method of collecting tax which combines the concept of “pay as you earn” and “collect as it is being earned.”
TDS ensures that tax is collected from a wider base of salaried people. On the tax payer’s end, the tax liability is distributed and they can claim back the TDS amount in their Income Tax declaration.
TDS on Recurring Deposits
Recurring Deposits were brought into the ambit of TDS by the Finance Minister Arun Jaitley in the Union Budget 2015. With effect from 1st of June, 2015, TDS will be deducted on the interest earned for Recurring Deposits at 10% per annum, under section 194A of Indian Income Tax Act.
The TDS for your Recurring Deposit will be deducted on any interest income which is above Rs. 10,000. So, if you have earned less than Rs. 10, 000 in the financial year, you won’t have to pay any TDS on your RD account.
However, this does not bring a full stop on the tax liability on your RD account. You will need to pay the applicable tax based on the accumulated amount in your RD account.
The applicable tax rates for RD accounts are as follows:
|TDS charged by your bank on RD account
|Below Rs. 2.5 lakhs
|Rs. 2.5 lakhs to Rs. 5 lakhs
|Rs. 5 lakhs to Rs. 10 lakhs
|More than Rs. 10 lakhs
How to claim TDS deduction?
The deductions for RD accounts are part of Section 80TTA of the Income Tax Act.
Interest earned on RD accounts have always been fully taxable, depending on your income slab rate. The only difference is that there was no TDS deduction earlier.
You need to declare the income received from the RD interest under the ‘Income from other Sources’ head in the Income Tax declaration. In case your income is not taxable, you can claim a refund on the TDS amount by submitting Form 15G and Form 15H.
For those who are aged above 60 years and have RD accounts, refunds can be claimed by submitting Form 15H.
In the case of minors, the interest earned on the Recurring Deposit is clubbed with the parent’s income. Once the minor grows up and starts earning, the interest income shall be taxable as per his income slab.
Now that you know that you need to pay TDS on your RD account, do not forget to declare your RD interest income and claim your TDS deductions on time, every time.