Recurring Deposits: Tax and Interest Rates

This is another post from the Suggest a Topic page, and this time we’re going to take a look at Recurring Deposits.

The original comment had a question on how tax is calculated on recurring deposits, and unfortunately I didn’t get any authoritative information on that. I did speak to one person who described how this will be calculated, but he wasn’t entirely certain himself.

So I will describe the tax on recurring deposits based on what he told me, and my own understanding and interpretation of what he said. I don’t know how accurate this is and if any of you have any good links or have practical experience, please do leave a comment.

Tax on Recurring Deposits

First, what I do know for sure – RDs are not tax free!

While doing research for this article I came across a few forums where people were asking if interest income from RDs is tax free or not. I don’t know what the origin for the question is but it could be people confusing no TDS with any tax at all.

Banks don’t deduct tax at source on RDs but the interest itself is taxable like other interest income. It will be added to the rest of your income and taxed at your slab.

This is what I think will happen

If you take a RD for the duration of over a year, say 2 years – then you will have to see how much interest accrues to you in one financial year, and then declare that interest as part of your return and pay tax on it.

So, even though you are still paying installments for the RD, and it hasn’t matured yet, you will need to declare the income that has accrued to you, and pay tax on it.

You add the interest income to your salary, and then pay tax on your regular tax rate. The interest earned can be calculated using a calculator such as the one on the Corporation Bank website.  

Let me reiterate that  I have never done this myself, and I am not a 100% certain if this is the right way or not – please do leave a comment if you know otherwise.

Here are some other things I found about RDs.

Interest rates on Recurring Deposits

I was going through the interest rate page of ICICI Bank, and saw that they give interest rates of 8.25% on RDs of 12, 15, 18, and 21 months, but they give 9.25% on a 390 day fixed deposit.

A few other bank websites said that they offered RDs at the same interest rate as the fixed deposit, but I think that means exclusion of special interest rates that banks give on deposits of 390, 555, 400 day maturities etc., and since these are the maturities that give you the higher interest rate, it looks like the interest on a RD will be lower than a fixed deposit.

Effect of Direct Tax Code on Recurring Deposits

I’ve seen that sooner or later someone comes along and asks how DTC will affect a particular product, so I thought to include this here.

There are no tax benefits of investing in RDs, they aren’t covered under Section 80C, and the interest is not tax free either. So, there are no tax benefits of investing RDs that will be affected negatively by the DTC. The tax slabs will change in DTC, and since interest income from RDs are going to be taxed according to your income slab – that’s the only effect that DTC will have on RD. In my opinion, this is not material or something that will make a difference in your decision to opt for a RD or not.

Stopping Recurring Deposits Early

Banks allow you to stop your recurring deposit earlier than the maturity period, but like fixed deposits, you get a lower interest rate than what you have settled for, and in some cases there is some penalty as well, which is also called a service charge in some banks.

Conclusion

In my mind, the difference in interest rates makes the fixed deposit a better option than a recurring deposit, and probably the only reason to do a recurring deposit is to get into the habit of saving and putting aside a fixed sum every month. Even so, I think shorter dated RDs are much better than longer dated ones because after a year or so you can take the maturity amount and open a fixed deposit where you will get a better return.

101 thoughts on “Recurring Deposits: Tax and Interest Rates”

  1. Hi I want to open RD dhanavarsha account in canara bank by internet banking. My doubt is can I open more than one dhanavarsha account from same savings account?

    1. You should contact your bank with the query. But IMO, there should not be any problem in opening multiple RD accounts. Suppose if there is one, then you can open other account for different period and/or with different monthly installment.

  2. What interest will I get on my RD if I liquidate it prematurely.
    Eg. An RD for 6 months with interest 8.75% is liquidated at 4th month.

  3. There is another form of RD Known as Flexi RD by PNB .It is daily interest product and in flexi RD one can deposit 20 times more money then committed at the time of opening RD in any month at any time or during all the months. People use this product in lieue os saving account by opening Flexi RD for duration of 1 year at the rate of interest 9%. There is No TDS .

  4. Icici has launched special saving scheme bank account holder-
    **CASH ADVANTAGE ****
    Basic Features of Cash Advantage –
    To deposit 2 lac up to 5 years and get 5000/-from 6 th years onwards every month for next 120 month to manage your monthly expanses. Get lump sum maturity with amt of 14.5 lacs at 15th years .
    Is it a good investment option. kindly suggest.

  5. according to me RD is better than FD because the bank will not deduct TDS even when the interest is more that rs. 10000.

    1. Even if there is no TDS on a RD i.e Recurring Deposit, an individual is still liable to pay Income tax on the interest earned from RD as the interest amount upon maturity adds to the annual income. The same needs to be shown while Filing IT Returns.

  6. Recurring Deposits
    Formula to calculate Maturity Value for Recurring Deposits
    FV =   P[((1 + (r / n))^Yn   -1) / (1-((1+(r / n))^ -n/12))]

    Symbols Description
    FV Future Value / Maturity value
    P Monthly Recurring Principal Amount
    r Rate of Interest expressed as decimal (so 8% = 0.08)
    Y Period in Years (No. of months/12, example 57 Months = 57/12 which is 4.750)
    n Number of times interest is compounded in one Year

  7. Hi,

    I have two questions (2nd one is out of context but will appreciate if considered for a reply)

    1. If I invest in 5 years RD (monthly deposit) in a post office, can we claim deduction under section 80C similar to FD > 5 years?

    2. Can a pensioner claim deduction under section 80GG or, sec. 10 (quote if any other sec. is applicable) against HRA? If yes, whats the rule? Pension is from Nationalised bank, does not have any HRA component

    1. 1. No, RD doesn’t come under 80C.

      2. You mean get tax exemption for the HRA that he is getting? But that’s an income then how will you get an exemption against it? Or maybe I didn’t understand the question correctly….

      1. He worked in a PSU Bank. He is retired now. He gets pension every month. There is as such no component of HRA in pension. Can he claim deduction against house rent he pays? If yes, to what extent & under which section?

  8. Hi,
    Great opportunity for investment, invest like RD and FD, invest in guaranteed Agrigold India Pvt Ltd, for RD give 11% interest and for FD in 6 years, it will double your amount, for further details contact – 9902408944

  9. Dear Paresh
    Thanks a lot for ur interst and advise on my problem..
    Really appreciate ur meticulous advise..
    Regards
    Samad

    1. Thank you.
      I think ,If you have opened RD account by mistake then ideal decision is to close RD and open fixed deposit…though you will loose some interest for said days.

  10. Hi ALL
    By mistake,Instead of Fixed deposit I opened a recurring deposit online of Rs 5 Lakhs for a period of 2 yrs..(thinking that Only this amount will be deposited)…
    But the statement says my maturity amount + Interst after 2 yrs will be Rs 1,31,14,223
    I was in a shock that how come there will so much returns
    1.Hence If I am not wrong does that means every month Rs 5 lakhs will debited from my account for the period of 2 years…(amounting to Rs 1,20,00,000 ,(Rs 1 Crore 20 Lakhs) Am I correct???
    2.If the scenario 1 is correct,then I do not have so much money with me…what am I suppose to do??
    3. What penalities will I have to bear(if any)?
    If scenario 1 is correct,I would like to stop this recurring deposit …how to do this etc…
    Pls help me and advise me accordingly..
    Regards
    Samad

    1. Of course,scenario 1 is correct and Rs.5 lakh per month will debited from your saving account.

      Now there are few things:

      1.You can close your RD any time.Most of the banks do not offer any interest if RD is preclosed within first quarter.(i.e before completion of 3 months).so penalty is that you will not receive any interest on principal if you foreclose it immediately.
      2.It will depend on your bank whether you can close it online or not.Few banks allow it and few do not allow.If its not possible online then you can submit service request form at your home branch for the same.
      3.Most of banks have provision of auto-closure of RD if two successive installments are missed so if there is not sufficient balance in your saving account to pay next two RD installments then it will be preclosed automatically.
      4.Few banks charge penalty for missed installments.Its like Rs.2-3 / 1000.
      So consider above points .Please check the provisions with your bank and take appropriate decision.

  11. Hi,

    A quick query here..

    I have already invested 40% of my monthly savings to SIP in mutual funds. I wish to invest the rest in debt.Say if i want to invest 15000 pm in debt what all options do i have?
    I am thinking of opening a RD of 7000 for 10 years(as the interests rates are currently high) and 8000 for 1 year(lump sum 96000 + interest). Then transfer the lump sum amount to PPF every April..Is this a good plan? If not, Any better plans/ideas??

    Thanks
    Ravish

  12. On how to account for tax on interest from RD Quoting from my post Overview of Recurring Deposits

    As discussed interest earned on the amount is fully taxable. It comes under the Income From Other Sources. But Tax is not deducted i.e TDS is not applicable on the Interest earned by Recurring Deposits as per current income tax rules. So how to account for the interest? Interest can be accounted based on method of accounting used. If the cash system of accounting is followed, the entire income by way of interest will be chargeable only at the time when the interest is received. If on the other hand the mercantile system of accounting is followed, the interest will have to be accounted in the respective years.

  13. Hi,

    Glad i saw this site. Very informative indeed.

    I have a quick query. Can i open more than 1 RD account in one bank? For example in ICICI

    1. In Post Office RD or banks like Canara Bank, or SBI there is no prescribed upper limit.In HDFC Bank monthly installment can be as large as Rs 14,99,900 per month. ICICI Bank website does not mention any maximum limit so as Manshu says you should be able to.
      Quoting from ICICI Bank RD webpage
      The minimum balance of deposit is Rs. 500 per month and thereafter, in multiples of Rs. 100.

    1. Most of the banks have Same rate for FD and RD.
      In karur vysya bank it is 10.00 .. i think its the highest rate

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