Recurring Deposit(RD) is a famous investment choice in India among the other low-risk investment plans with moderate and assured returns. There are many lucrative features of having a recurring deposit account. Because RD comes with a choice of investment amount and tenure along with multiple other advantages. Moreover, this investment plan is offered by multiple banks and NBFCs (non-banking financial companies). It also helps in monthly savings for long or short-term funds.
Besides this, RD provides flexible tenure options that vary from 6 months to 10 years. Investors can therefore opt for a minimum amount to be invested every month over the term for assured wealth generation. If you don’t have a lump-sum amount to fulfill your short-term financial goals, then depositing a small portion of your income to the recurring deposit account every month serves the purpose well. In this article, you will be familiar with the features, benefits, and types of recurring deposit accounts.
What is a Recurring Deposit?
An RD is a special kind of deposit provided by banks or NBFCs. It helps people with regular incomes to deposit a fixed amount on a monthly basis in their recurring deposit account to earn interest at the rate applicable to fixed deposits.
You can open your Recurring Deposit account with multiple financial companies such as banks, NBFCs, or also post offices. While the minimum amount of investment may vary from one institution to another. You can easily start with a little amount, say Rs. 500 monthly, as per your budget.
Therefore, the right RD will be the one that enables an appropriate investment amount and also gives a maturity choice. In this way, it will perfectly fit your short or long-term funding plans. Thus, you must confirm the available flexibility while selecting the financial institution to invest with.
Features of Recurring Deposit Account
RD allows you to get fixed interests on the amount invested at frequent intervals until the investment matures or a predetermined term ends. The total amount (i.e., the capital invested and the interest accumulated) is splurged to the investor after the maturity period completes.
Here is a table that gives a short overview of RD features:
| RD Features | Applicability |
|---|---|
| Interest Rate | Between 5% to 8% (variable from one bank to another) |
| Minimum Deposit Amount | From Rs.10 |
| Tenure of Investment | From 6 months to 10 years |
| Frequency of Interest Calculation | Every Quarter |
| Mid-term or partial withdrawal | Not allowed |
| Premature account closure | Allowed with penalty |
Now, we will discuss these features of recurring deposit accounts in detail.
Minimum Investment on RD
The minimum investment amount varies from one bank to another bank. But one can open a recurring account with an amount of Rs.10.
Deposit Term
Also, the minimum deposit tenure commences from 6 months. One can select a suitable time period of deposit with a maximum tenure extending up to 10 years.
Interest Rate of a Recurring Deposit Account
The rate of interest given on RDs is always more than the interest obtained through a bank savings account. The interest rates provided on RDs are also as same as the interest you earn through FDs. Although, the periodic investment instead of a lump sum amount makes it more appropriate for individuals who desire to create a corpus through their monthly savings.
Withdrawal on Maturity
Withdrawal from the RD account is allowed only after it reaches maturity. Although, if you select to withdraw the amount before the maturity period ends, then you need to pay the premature penalty.
Loan Against Recurring Deposit
You also have a choice to get a loan against the recurring deposit. Banks may give permission up to 95% of the deposit amount as a loan against a deposit that will be used as collateral.
Standing Instructions for Monthly Recurring Deposits
If you find it inconvenient to deposit the amount periodically. Then banks also facilitate such payments as deductions from a linked account (savings or current) upon standing instructions.
Returns on RD – Interest earned
Almost all banks in the country as well as many other financial institutions provide Recurring Deposit investment options. The interest rates are, therefore, highly competitive. Based on the current market trends at the time of account creation, the interest rates may vary anywhere between 5% to 8%. Although, the average interest rates flutter around 6% to 7% for many banks.
Moreover, the interest rates in RD also vary based on the investor’s age. For example, senior citizens can enjoy the advantage of higher interest rates as against the existing interest rates for regular RD schemes. Besides this, you can also calculate your RD returns by using RD Calculator.
Benefits of RD Investment
Moving further, as the return of principal amount investment and the accumulated interest as per the applicable rate is guaranteed, RD becomes a risk-free investment tool. Let’s see the other benefits it brings.
Useful in fulfilling financial goals
RD is a fully risk-free investment option whose guaranteed returns make it perfect for reaching both short and long-term goals. Therefore, RD is the best investment option if you need financial help to satisfy the below-mentioned requirements.
- Cost of higher education for your children
- Home renovation and furnishing expenses
- Vacation in Abroad
- Expenses on marriages
- Inculcates savings discipline
A Recurring Deposit plan needs you to create fixed monthly investments. It also assists in inculcating a savings discipline. Besides this, it is useful more for salaried individuals who have many financial goals to complete with a fixed income.
Immunity from interest rate swings on RD
The interest in RD is calculated at a fixed rate throughout its tenure. So, if your bank gives a rate of interest of 6.50% on your RD. Then the interest calculation will be done at this rate regardless of the changing market trends or change in your bank’s policies regarding the interest rate provided.
Therefore, you must not worry about any RD interest rate reductions. The interest income from Recurring Deposit is taxable, with TDS deducted by the bank at the rate of 10% if the income is more than Rs.10,000. In case, your annual income is less than the minimum exemption limit, you’ll be able to save on this tax by providing Form 15G to your bank. For senior citizens, Form 15H is applicable.
Apart from the recurring deposit investment options, you can also go for more short-term investment plans. Click here to grasp more about them.
RD Renewals and Deposits on Investment
There are some conditions regarding a premature or partial withdrawal of RD if you want withdrawals before the tenure end.
For premature RD withdrawal
- If you start premature RD closure before the tenure ends, you’ll enjoy interest for the deposit period. Also, a premature withdrawal penalty of 1% is levied by the bank.
- Moreover, FD plans include a lock-in period, the minimum of which is sometimes three months. If you withdraw before this period, the interest generated becomes zero, and you will get only the amount deposited.
- If you opt for premature RD withdrawal, then you will be ineligible for any additional incentives applicable.
For partial RD withdrawal
- Banks don’t allow partial withdrawal of the RD amount.
- However, some banks provide an overdraft or loan against the deposit as collateral. But you need to repay this loan in a lump sum.
- Although, Post office RDs allow partial RD withdrawal if the account is maintained for more than a year.
Types of RD Investment
Apart from the regular RDs in which you can invest to get interest income and grow your corpus, RDs are also available in other types, suitable for various investors. Let’s have a look.
RD for Senior Citizens
This type of RD has the same features as a regular RD. But this investment scheme for senior citizens has higher interest rates than regular accounts. The interest is compounded quarterly according to the applicable interest rate. Thus, helping senior citizens withdraw a higher maturity amount and fulfill their short-term funding needs in an efficient way in the absence of a regular income. Usually, the additional interest rates provided by many banks on the senior citizen RD plan vary between 0.25% and 0.75% above the regular deposit rates.
RD for NRI/NRE
Also, RD plans are one of the best investment tools for NRIs (Non-Resident Indians). Substantial returns through investment can be generated with a little recurring investment amount per month. As an NRI, one can invest in RDs either through an NRE or NRO recurring deposit account.
Through NRO accounts:
NROs are non-resident ordinary accounts where the investment is deportable given the account holder meets the requisites. Besides this, the investment in these accounts can come only from an NRE or NRO account. Moreover, the interest obtained through these accounts is taxable at a 30% slab and also attracts extra CESS.
Through NRE accounts:
Any kind of deposit or investment to these accounts is allowed only through an NRE account. NRE represents a non-resident external account and income generated through it is not taxable in India. In addition, a hassle-free account transfer facility to the investor’s home country is also available for this account.
Flexi RD
Flexi RD deposit plans allow a person to invest a pliable amount as per his/her convenience. When the core investment amount is pre-decided in this type of deposit, the account holder has a choice to deposit amounts in multiples of the core amount.
For instance, if the core deposit amount is determined at Rs.1,000, the investor can prefer to deposit in its multiples, like Rs.2,000, Rs.3,000, etc. When the investment flexibility is available, interest on the amount is calculated at a fixed rate. Interest calculation on the core multiples is done depending upon investment duration. Several banks provide flexible RD plans with varying tenure and conditions.
In short, you have to select your RD scheme wisely before starting investing. Also, check the terms, conditions, and incentives provided by various banks to determine the right option. Compare the offers carefully to choose the one with the maximum returns in the shortest period for optimum earning.
Also, you can look for other best investment plans along with their pros and cons so that you can earn higher interest. Click here, for further details.
You can also invest in the National Savings Recurring Deposit Scheme. It is the investment scheme offered by the government. Click here to know more about it.
FAQs Regarding Recurring Deposit Account
Well, a Recurring deposit is especially for those who don’t want to invest lump-sum and would like to put money on a daily basis. Recurring deposits are perfect for those investors who desire to fulfill their short-term goals.
Yes, there is a feature of tax exemption as well on Recurring Deposits if the investors invest in this scheme through India post under the 5-year plan. According to Section 80C of the Income Tax Act of 1961, the maximum taxable deduction one can get is Rs.1.5 lakh.
Yes, all the recurring deposits have a nominee or beneficiary allocated to the account. Moreover, one can also change the nominee at any time just by doing the suitable paperwork with your bank.
Editor’s Note | What is Recurring Deposit?
Due to the COVID-19 pandemic, the monetary policy has reversed. As the central bankers are on a rate-cutting splurge to save their economy from falling into recession. Because the Reserve Bank of India (RBI), has reduced the repo rate by 75 basis points to 4.40%. The repo rate is the rate at which all the banks borrow from the central bank. Thus, this repo rate has a direct implication on the deposit rates.
