Recurring Deposit: A Comprehensive Guide
A Recurring Deposit (RD) is a fixed deposit in which individuals can deposit a fixed sum of money each month into their account for a specified tenure. This savings scheme is provided by banks and financial institutions and is aimed at making people save on a regular basis. Recurring deposits are a favorite among those who like disciplined saving with assured returns. Here’s the step-by-step analysis of everything you should know about Recurring Deposits (RD):
1. What is a Recurring Deposit?
A recurring deposit is a type of savings account wherein the depositor deposits fixed contributions every month for a certain term, e.g., 6 months, 1 year, etc. The deposited amount will earn interest and at the end of the period, the cumulative deposit (principal + interest) will be credited back to the depositor.
2. How Is a Recurring Deposit Operated?
You undertake to deposit a specific amount of money periodically (most often monthly) for a specified duration.
The rate of interest is typically decided while opening the RD account and is the same for the whole duration.
The money gathered is earning interest, which is released at the maturity of the tenure along with the amount.
3. Major Features of Recurring Deposits
- Fixed Monthly Deposits: You make equal monthly deposits for the duration of the RD.
- Guaranteed Returns: Like fixed deposits, RDs provide guaranteed returns based on the agreed-upon interest rate.
- Tenure: The duration of an RD can range from 6 months to 10 years.
- Interest Rates: The interest rate on RDs is typically higher than that of regular savings accounts but lower than that of fixed deposits.
- Premature Withdrawal: During times of emergency, you can withdraw your RD prematurely, but there are usually charges for this.
4. Interest Rates on Recurring Deposits
- Fixed Rate: The rate of interest on an RD is generally fixed when the account is opened and is not altered during the tenure.
- Comparison with Other Investments: RD interest rates are higher than that of savings accounts but lower than other fixed investments such as Fixed Deposits or Bonds.
- Senior Citizens: Certain banks charge higher interest rates on RDs for senior citizens.
- Compound Interest: RD interest is compounded quarterly, which makes your money grow faster than simple interest.
5. Benefits of Recurring Deposits
- Disciplined Savings: RDs promote disciplined saving habits, so it is an excellent choice for individuals who struggle to save in lump sums.
- Fixed Returns: As the interest rate is fixed, you are assured of your returns at the end of the term.
- Flexible Tenure: You can select the tenure according to your savings needs, ranging from a few months to a few years.
- Loan Against RD: You can avail a loan against your RD from some banks, typically up to 90% of the balance in RD, and can be of use during emergencies.
- No Market Risk: Because RDs provide fixed returns and interest rates, you are not exposed to market risk, as is the case with investment in stocks and mutual funds.
6. Eligibility Criteria
- Age Condition: As a general rule, a person above 18 years can open an RD. An RD may also be opened by minors through a guardian.
- Indian Residents: The facility of an RD is provided to Indian residents alone, but it is possible for non-resident Indians (NRIs) too to open RDs in some banks subject to certain conditions.
- No Minimum Income: There is generally no minimum income requirement to open an RD, but the monthly deposit amount is predetermined and must be affordable for the account holder.
7. How to Open a Recurring Deposit
To open an RD, simply follow these steps:
- Select a Bank: Choose a bank or financial institution offering competitive interest rates on RDs.
- Submit Documents: Submit identification documents (e.g., PAN card, Aadhar card, proof of address).
- Select Tenure and Amount: Determine how much you want to deposit every month and for what tenure of the RD.
- Finish Formalities: Complete the application form and make your initial deposit.
- Online Banking: Several banks even enable customers to open and operate their RD accounts online.
8. Essential Things to Bear in Mind Before Opening an RD
- Monthly Commitment: RDs involve a mandatory monthly deposit, which can be a strain on your finances if you encounter an unexpected cash crunch. Make sure the monthly deposit is affordable.
- No Partial Withdrawals: In contrast to savings accounts, RDs do not permit partial withdrawals during the tenor. You will have to wait until the tenor period is over to withdraw your funds.
- Premature Withdrawal Penalties: In case you want to withdraw your RD prematurely, you might incur penalties, and the rate of interest might decrease.
- Interest Taxation: The interest accrued on RDs is tax-deductible according to your income tax slab. TDS (Tax Deducted at Source) can be deducted if the interest accumulated is above a threshold in a financial year.
9. Penalties for Non-Payment
If you default on a monthly installment in an RD, the bank can charge a penalty. This might lead to reduced interest accrual or even a cut in the overall rate of interest, depending on the policies of the institution. There might also be a grace period for delayed payments in some banks.
10. Loan Against Recurring Deposit
Most banks provide the facility to avail a loan against your RD. The loan value is usually a percentage (most often up to 90%) of the value of the RD. But interest will be levied on the loan, and non-repayment of the loan may lead to penalties or confiscation of the RD.
11. Taxability of Recurring Deposits
- Interest Tax: The interest received on RDs is taxable as income and attracts income tax. TDS can be withheld if the interest exceeds the threshold limit (presently Rs 40,000 for those less than 60 years old and Rs 50,000 for senior citizens).
- Form 15G/15H: If your income is less than the taxable amount, you can file Form 15G or 15H to exempt yourself from TDS deduction.
12. Suitable Candidates for Recurring Deposits
- Regular Savers: RDs are ideal for individuals who prefer to save a specific sum of money periodically without the hassles of dealing with stocks or mutual funds’ volatility.
- Risk-Averse Investors: If you’re one such individual who wishes for safety and certain returns, RDs are your safest bet.
- Savers with Particular Objectives: Those with a specific savings target (for education, a vacation, etc.) can opt for RDs to accomplish the task.
13. Conclusion
Recurring deposits are a great method of inculcating the habit of regular savings with assured returns. With fixed interest rates, flexibility in the tenure, and security of your deposits, RDs appeal to a wide variety of individuals, ranging from salaried employees to pensioners. They are not, however, for those who desire instant access to their money or those who desire high returns. Through carefully choosing the correct RD scheme, you can make your savings multiply in the future, and thus fulfill your objectives.