What is a Recurring Deposit?
A Recurring Deposit (commonly referred to as an RD) is special kind of deposit offered by Banks and Post Offices in India wherein the account holder can invest a fixed sum of money every month, for a predefined period, and earn an interest at the rate applicable to fixed deposits.
It is a kind of systematic investment plan made to build savings through regular monthly deposits. Investors who cannot set aside a lumpsum to save, typically, people who have fixed regular incomes find this scheme attractive so as to have funds available at the time of an emergency or as required by them- for childrens’ education, or family planning, or for acquiring assets, or planning for retirement etc.
1) Account Opening: The RD account may be opened either offline by visiting a bank where you have a savings account, or online by making use of the bank’s internet banking facility or the mobile app. For opening the RD in the post office, one has to visit the nearest post office.
The name as well as mode of operation and branch of a newly generated RD account is the same as in the savings account from which RD account is funded.
2) Amount of Deposit: The minimum amount of investment is Rs.10 per month varying for each institution (In a Post Office one can open an account with a Rs. 10 investment, in public sector banks the minimum amount being Rs. 100 and in private banks the minimum amount is Rs. 500 to Rs. 1000).
3) Tenure: Minimum period is six months, the maximum being ten years.
4) Interest Rate: The interest is compounded quarterly. The rate of interest may vary at every bank but be in accordance with their fixed deposit interest rates. And senior citizens get the benefit of additional interest of 0.5%.
5) Maturity and Withdrawal: The maturity amount includes the principal invested and the interest earned. On maturity, the funds are credited to the savings account selected by the account holder for opening the RD.
Premature and mid term withdrawals are not permitted. However, the bank may allow to close the account before the maturity period with a 1% penalty for premature withdrawal. The interest payable will be calculated based on how much of the tenure is completed.
6) Loans: Banks also offer loans upto 80 or 90% of the deposit value having the RD as a collateral. Banks normally charge 1% interest above the deposit rate for these loans.
7) Tax on Interest: The interest earned above Rs.10,000/- is taxable at source at 10%. In order to avoid tax deduction at source, those who do not fall in the taxable income slabs, and those with agricultural income must submit form 15G in the bank. Senior citizens FG form 15H needs to be submitted in the bank to avoid the tax deduction at source. There is no TDS for NRI deposits.
Over the years, a Recurring Deposit has become a popular savings alternative to fulfill financial needs because it offers guaranteed returns, offers an ease in investment (monthly basis), is risk free and safe as compared to other methods of investment like Mutual Funds or stock market investments. Investors who look for fixed returns with no volatility may consider an RD to create a corpus to meet the goal which is planned for a later date. However please do note that banks levy a penalty for non payment of monthly installments. And if six consecutive monthly installments are not paid, banks reserve the right to close the account and pay the balance to the account holder (paying interest as per the premature withdrawal policy of the Bank).
While many avail the RD Scheme by banks to be prepared for exigencies, many who forego the thought of savings are now faced with the problem of shortage of funds arising from layoffs and salary cuts by various organisations. Who knew a pandemic that would create havoc worldover was on its way. But it is never too late, it is now time we get wise and start planning the way ahead from here on. Let us follow the well known proverb that many learnt and grew from- “A penny saved is a penny earned!”
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