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?

Tenure

Most of the Banks offer Recurring Deposit of 6 months to 10 years. The tenure can be in multiple of 3 months.

Installment

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 limitThe 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.

Interest Rate

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.

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