How are recurring deposits taxed?
When it comes to taxation aspect, recurring deposits are not the most tax efficient financial instruments. If you are getting an interest higher than Rs. 10,000 in one financial year, TDS will be deducted just like bank fixed deposits. The interest received is added to your total annual income and taxed accordingly.
Recurring Deposits (RD) are taxed just like Fixed Deposits and Tax Deducted at Source (TDS) is applicable. Furthermore, a RD account can be declared while filing income tax returns. This ensures that lesser tax is deducted and hence better returns are earned annually by the depositor.
TDS becomes applicable when the depositor exceeds the cap of Rs.10,000 of interest earned in a financial year. This limit is Rs. 50,000 for senior citizens.
TDS is deducted with every payment that the bank makes towards an account that is earning over Rs.10,000 as interest.
Furthermore, TDS is deducted even if the amount has not yet been paid to the account holder physically. Accrued interest is tax deductible.
How can TDS be avoided?
A suggestion towards avoiding TDS would be splitting the deposit amount that you have into different accounts across different branches. This should be done ensuring that the interest earned by each account does not exceed Rs.10,000.
Choosing the time and tenure of the deposit account with the view of dividing the interest accrual between two financial years aiming to not cross Rs.10,000 also would help avoid TDS.
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