Are Recurring Deposits tax free in India?
To clear this confusion, below I have penned down all the must know information about Recurring Deposit.
What is Recurring Deposit?
Recurring Deposit is a SIP under which you have to pay certain agreed amount for a particular time period. Unlike fixed deposit where a lumpsum amount is deposited at once, in recurring deposit a regular monthly amount is deposited. You have to select the term and amount of the investment.
What are Tenure, Interest Rate and Minimum Deposit of Recurring Deposit?
Most of the Banks offer Recurring Deposit of 6 months to 10 years. The tenure can be in multiple of 3 months.
Almost all banks offer this scheme and you can invest as little as Rs 5 with public sector banks or, Rs 500 with private banks, though some banks may have higher limit. The amount of installment and number of installments cannot be altered once the account is opened.
An Investor can ask bank to deduct the stipulated amount from savings or current account every month. Deposit can also be made through internet banking.
Recurring Deposit offered by banks carry similar interest rate to fixed deposit for similar tenure. However some banks like Bank of India gives 0.5% extra interest rate for Recurring Deposit as compared to Fixed Deposit for similar tenure. Interest on Recurring Deposit is compounded quarterly.
Who Offers Recurring Deposit Schemes in India?
Only Banks and Post-Offices are authorized to offer Recurring Deposit Schemes. Any other organizations like companies, NBFCs are barred from offering RD Scheme.
Who can Invest?
All Resident Indian and HUF are eligible to open Recurring Deposit Account with any bank or post-office. Even NRIs are also allowed to open Recurring Deposit Account through NRE Account but with bank not post-office. Account can be opened individually or can be applied jointly with any family member, even a minor.
Is interest earned on recurring deposit taxable?
Yes, Recurring Deposit is taxable. A lot of people think that Recurring Deposit is tax-free but it’s not true, interest earned on Recurring Deposit is taxable under the head “Income from Other Sources”. Unlike Fixed Deposit where tax is deducted from interest in the form of TDS, onus of paying tax in Recurring Deposit is totally upon the Investor. Although the interest is received with the principal amount on the maturity but tax is to be paid on the interest accrue every year.
If RD is in the name of minor then the interest accrue shall be clubbed with the income of the parent with higher income.
What are Recurring Deposit benefits in India?
Interest Rate of Recurring Deposit is similar to Fixed Deposit, thus it is preferred investment scheme for small investor who cannot deposit a huge amount at once in Fixed Deposit.
Further, since there is no TDS, assessee who has income below the taxable limit does not need to file return for refund.
Loan/Overdraft upto 90% is provided by banks against the amount available in Recurring Deposit Account. The interest is generally 0.5% to 1% more than that offered to Recurring Deposit.
Points to Ponder
- In case of default in payment of installment, banks can levy a penalty or even can close the account if the default goes over the limit (mostly 6 months). Although the deposited amount will be given back to the investor.
- Recurring Deposit can be revived by paying the dues within one month from the last default.
- Premature withdrawal attracts penalty like Fixed Deposit (1-2 percent).
- A recurring deposit account has a lock-in period of one month.
- Premature closure in less than a month will not earn interest.