What is Recurring Deposit: Features, Benefits, and How to Invest

What are Recurring Deposits?

A Recurring Deposit (RD) is a financial instrument offered by banks and financial institutions in which individuals can deposit a fixed amount of money at regular intervals. This scheme is designed to inculcate the habit of regular savings among people. Unlike a Fixed Deposit (FD), where a lump sum amount is deposited for a fixed tenure, an RD involves periodic deposits of smaller amounts, making it accessible for individuals with varying income levels.

Features of a Recurring Deposit Account

1. Fixed Monthly Installments: Depositors need to commit a fixed amount of money every month for a specified tenure.
2. Tenure: The tenure for an RD typically ranges from 6 months to 10 years.
3. Interest Rates: Interest rates on RDs are similar to those on Fixed Deposits, often varying between 5% to 7%, depending on the bank and the tenure.
4. Premature Withdrawal: While RDs encourage disciplined savings, premature withdrawal is allowed but comes with a penalty, reducing the interest earned.
5. Loan Facility: Many banks offer loans against the amount accumulated in the RD account.
6. Minimum Deposit Amount: The minimum deposit amount can be as low as ₹100, making it accessible for people from all financial backgrounds.
7. Taxation: Interest earned on RDs is taxable, and Tax Deducted at Source (TDS) may apply if the interest income exceeds a specified limit.

Returns on RD – Interest Earned

The interest earned on an RD is compounded quarterly, which means the interest is calculated every quarter and added to the principal. The compounding effect ensures that the returns are higher than simple interest calculations. However, the actual returns will depend on the interest rate offered by the bank and the tenure of the RD.

Eligibility for a Recurring Deposit

Eligibility criteria for opening a Recurring Deposit account are straightforward:

• Individuals: Both residents and non-residents can open an RD account. Minors can also open an RD account under the guardianship of a parent or legal guardian.
• Businesses and Organizations: Firms, companies, and other entities can also open RD accounts.
• Joint Accounts: RDs can be held jointly by two or more individuals.

Important Factors to Check Before Applying for Recurring Deposit

1. Interest Rate: Compare the interest rates offered by different banks to ensure you get the best return on your investment.
2. Tenure: Choose a tenure that aligns with your financial goals and liquidity needs.
3. Premature Withdrawal Penalty: Understand the penalties associated with premature withdrawals to avoid unexpected deductions.
4. Bank’s Reputation: Opt for a reputable bank to ensure the safety of your investment.
5. Loan Facility: Check if the bank offers loans against RD and the terms associated with such loans.
6. Tax Implications: Be aware of the tax implications and TDS rules applicable to the interest earned on your RD.

Types of Recurring Deposits

1. Regular Recurring Deposit: The standard RD account where a fixed sum is deposited at regular intervals.
2. Flexible Recurring Deposit: Allows depositors to vary the installment amount based on their financial convenience, rather than sticking to a fixed monthly amount.
3. Senior Citizen RD: Offers higher interest rates specifically for senior citizens.
4. NRE/NRO RD: Recurring Deposit accounts for Non-Resident Indians (NRIs), with interest rates varying based on the source of the income (NRE or NRO).

Suggested Read: Protecting Yourself from UPI Fraud

Benefits of RD Investment

1. Disciplined Savings: Encourages regular savings and financial discipline.
2. Low Initial Investment: With minimum deposit amounts being low, it is accessible to a broad demographic.
3. Guaranteed Returns: Offers assured returns as the interest rate is fixed at the time of account opening.
4. Loan Facility: Enables borrowing against the RD, providing liquidity in times of need.
5. Flexible Tenure Options: Provides a range of tenure options to suit different financial goals.
6. Risk-Free: Being a bank deposit, it carries minimal risk compared to market-linked investments.
7. Tax Benefits: Though the interest is taxable, certain banks offer RDs under tax-saving schemes.

In conclusion, Recurring Deposits are an excellent saving instrument for individuals seeking regular, risk-free returns while inculcating a habit of systematic savings. By considering factors such as interest rates, tenure, and bank reputation, investors can maximize the benefits of their RD investments.