Is the interest earned on bank RD taxed and how?
Yes, the interest earned on bank fixed deposit is taxable under the Income Tax Act, 1961.
The interest earned on RDs is taxed as per one’s income tax slab on an accrual basis. However, the bank first deducts tax at source (TDS). TDS with respect to interest earned on your bank RD is deducted based on the total
interest projected on the aggregate of your bank RD for the financial year.
The rate for TDS (Tax Deduction at Source) is 10% if PAN is furnished; and if not, TDS is 20%. No surcharge or cess is levied over and above this basic rate.
If the total projected interest in a financial year crosses the threshold limit, which is currently Rs 10,000 for non-senior citizens, TDS is deducted proportionately from the existing fixed deposits at the time of interest
application. For senior citizens (60 years and above), the union budget 2018 has increased the exemption of interest income on deposits with banks (includes fixed deposits) and post offices from Rs 10,000 to Rs 50,000.
In case, you have no other income apart from interest income, in order to avoid TDS, you can submit a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for
senior citizens), as applicable.