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How are recurring deposits taxed..?
The first question you need to ask of your financial investments How will your returns be taxed?
If you are a conservative investor you will invest your money in a fixed deposit. You earn interest on a fixed deposit which is taxed.
The interest you earn from the fixed deposit is added to your taxable income and you are taxed as per the income tax slab you fall under.
If you fall in the 10% tax slab you are taxed on the interest income you earn at 10%, and if you fall in the 30% tax slab you will be taxed on the interest you earn at 30%.
How is a recurring deposit taxed?
You are taxed on a recurring deposit in the same way as a fixed deposit. The interest you earn on the recurring deposit is added to your taxable income and you are taxed as per the income tax slab you fall under.
If you fall in the 30% tax bracket you have to pay 30% tax on the interest income you earn from the recurring deposit. (Marginal rate of taxation).
So what is the difference in taxation between a fixed deposit and a recurring deposit?
There is a TDS (Tax Deducted at Source) on the interest income you earn from a fixed deposit if your interest income is above INR 10,000 a year.There is no TDS if the interest income you earn is below INR 10,000 a year.
There is no TDS on the interest income you earn on a recurring deposit. This made recurring deposits the darling of investors purely because of this.
The new rules….
As per the Union Budget 2015-16 there will soon be TDS even on the interest income you earn from a recurring deposit.As per Section 194 A you will have TDS deducted on the interest income you earn above INR 10,000 on your recurring deposit.
There is no TDS on the interest income you earn up to INR 10,000 a year on the recurring deposit.The new rule is expected to come in force from 1st June 2015.
This has resulted in investors removing their money from the recurring deposit. (Premature closure of the recurring deposit accounts).
Why do the new rules mean you must compulsorily file income tax returns?
If you are eligible to file income tax returns and you do not do so then you have cause for serious concern.The TDS is credited to your PAN card number and not mentioning your interest income from the recurring deposit when you file your returns or not filing your returns means you are in trouble.
The CASS (Computer aided scrutiny system) used by the tax department detects a mismatch in your tax credit and income declared if you have filed your returns and not mentioned the interest income from the recurring deposit.
If your recurring deposit has deducted TDS but you have not filed returns then the tax department will ask you about it.You must be aware of taxation on a recurring deposit before you make an investment.
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