Recurring Deposits – Tax provisions on Interest and Principal amount

Recurring deposits are the best investment option when you do not have a lump sum amount to invest. In a recurring deposits scheme, you can invest a fixed amount periodically to get a good return at the end.

In our previous article we have discussed income tax provisions on fixed deposits and various drawbacks. Today in this article we will discuss income tax provisions on recurring deposits.

Tax provisions on Interest on recurring deposit

Interest from a recurring deposit is taxable. At the year end, you are required to add the interest income to your other incomes while calculating income tax liability.

Banks and post offices do not deduct TDS on recurring deposits. For this reason, you should not presume that the interest on recurring deposit is tax free.

As far as the rate of tax is concerned it all depends on your income tax slab rate. If you are falling into higher income tax slab rates or by adding interest on recurring deposit income you have been sifted to higher slab rates then you are eligible to pay 30% tax on your interest income or else you can even be charged 10% or 20% based on your status and applicability rates.

Don’t think that interest will be taken into account after recurring deposit is matured. No, you are required to calculate the accrued interest every year and take it to your income tax return for tax calculation.

Also Read: Tax deduction under section 80TTA for interest on saving account with bank, co-operative bank and post office.

Tax provisions on principal amount of recurring deposit

You will not get any benefit for investing in recurring deposit. Like in the case of 5 years fixed deposit or PPF, here no deductions are allowed under section 80C of income tax act.

At the time of maturity also you do not pay any tax on your invested principal amount. Only tax that needs to be paid is on the interest amount for the last year which is not yet taxed.

From tax point of view we recommend investing in public provident fund scheme or insurance for a long term benefits. You can even have a saving account in a private bank like yes bank or kotak or Indusland to have higher interest rate. 10000 rupees deduction is available on interest income from a saving account which is not available in interest from recurring deposits.

Also Read: How to get maximum benefits out of your recurring deposit