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Taxability of interest from Recurring Deposit(RD):

Recurring Deposits are regular monthly investment plans offered by banks and other financial institutions. RDs are like term deposits wherein you don't invest in lumpsum, instead invest with a small monthly amount contributed regularly till the maturity of deposit. Its a good way of regular saving. For example- Rs. 1000 invested every month for three years will fetch you Rs. 36000 plus interest (as per the rates provided by your bank) at the end of three years. Generally interest rates for FDs and RDs are same.

TDS on RD interest-
There is no tax deduction at source on interest earned on recurring deposits. As there is no TDS on RD interest, people feel that interest on RD is tax exempt. But its not the case. RD interest is fully taxable and shall be included in total taxable income as income from other sources.

Budget 2015 has proposed TDS on RD interest too. From financial year 2015-16, TDS may also be deducted on RD interest if it exceeds the limit of Rs. 10000. Details will be updated on approval of Budget 2015.

Time of taxability of interest on RD:
This question is asked many times. When shall we declare interest from RD in our Income Tax Return- at the time of maturity of deposit or yearly. Ideally interest from RD shall be included in Income Tax Return on accrual basis, ie. yearly when it is earned. However if you miss to declare it yearly, it must be declared in lumsum on maturity.

It is beneficial to declare earned interest on yearly basis, as declaring a lumsum interest at the maturity will increase your income of that year by a higher amount and this may take your total income to tax bracket or to a higher tax slab. However if interest is declared yearly the increase will not be that high and also tax liability will be distributed over the term of deposit.

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All about Tax saving FDs
Tax & TDS on Fixed Deposit(FD) interest
Interest from Savings Bank Account & Section 80TTA

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