Recurring Deposit or RD is a preferred investment choice amongst low-risk investment options with moderate and assured returns. It provides the flexibility of both investment value and savings duration and gives a whole lot of attractive benefits. A depositor can engage in monthly savings in the range of six months to ten years as per the saving capacity and benefit from assured wealth generation. Moreover, investors can easily save a small or large part of their monthly income to fulfil short-term or long-term monetary requirements.
What is a Recurring Deposit?
A recurring deposit is a distinct category of term deposit provided by the banks to assist individuals with monthly earnings to invest a regular fixed value and earn interest equivalent to fixed deposit rates. Hence, in other words, RD is much alike a fixed deposit investment of a particular investment sum and paid for it through regular instalments. The deposit amounts lead up to a fixed maturity date and empower investors to engage in regular small savings to build up a substantial amount to fulfil their futuristic financial needs. The minimum RD deposit duration is six months while the maximum is a ten-year tenure.
The RDs are deducted from the customers' bank accounts through standing instructions, wherein the banks withdraw a specific pre-decided investment amount from customers' savings or current account and deposit in the recurring deposit account.
The rate of interest on an RD is compounded on a four-monthly basis with a fixed upfront rate of penalty in the case of a missed deposit amount. Simultaneously, a fixed maturity value is projected at the point when the RD is opened, and this value is estimated based on the agreed monthly deposit amount. Hence, in the instance of an instalment delay, the payable interest would automatically come down and would be insufficient to attain the maturity amount. In such a case, the bank would levy a penalty by deducting the difference in interest from the projected maturity value.
Loan on Recurring Deposits
Customers have the option to acquire loans based on the collateral of a recurring deposit. This loan could be availed in the range of 80- 90 percent of the deposit value.
Minimum Investment Amount on Recurring Deposits
The facility of Recurring Deposit is offered by many types of monetary bodies like post offices, NBFCs, and banks. Different institutions have their requirements for the minimum investment amount. However, in general, the financial institutes allow their customers a minimum monthly deposit amount of 500 INR.
Irrespective of the lower investment limit, it is advisable to save as per individual investment capacity to experience the maximum maturity benefit and fulfil the future monetary objective.
Tax on Recurring Deposit
A recurring deposit is a taxable investment and the investor has to pay a specific TDS (Tax deducted at source) amount as per the interest amount generated. In the instance that an RD's annual interest exceeds 40,000 INR, a TDS value of 10 percent of the overall interest rate would be deducted by the financial body. Further, people have to pay income tax on the RD interest as per the rate of the tax slab of the RD investor. Hence, if you open a recurring deposit and your earning does not fall under taxable income, then to get an income tax exempt from both fixed deposits and recurring deposits you will have to submit form 15G. In the case of older adults (age> 60 years), the investors would have to file form 15H to get a TDS exempt on both fixed deposit and recurring deposit.
Benefits of Recurring Deposit
A recurring deposit is a preferred investment option because it delivers risk-free and smart savings. Here the depositor gets an added benefit by receiving the return on the principal investment amount along with accumulated interest on that principal value. Rd also provides added benefits in terms of financial goals fulfilment and immunity from interest rate savings.
Useful in fulfilling financial goals
As a risk-free investment, RD offers guaranteed proceeds that make it ideal to fulfil both short-duration and long-duration financial objectives. People invest in recurring deposits for different monetary purposes which are listed below.
Engage in planned savings for a child's higher education.
Plan monthly savings for home furnishing and renovation.
Plan for an overseas vacation.
Save for an impending marriage.
Practice in planned investments.
Recurring deposits are more suitable for salaried professionals with fixed monthly incomes as it allows them to invest in a planned and secure manner and take care of diverse monetary needs. In a way, RD inculcates a discipline in saving and teaches the individuals to save in a planned manner for fulfilment of diverse fiscal goals.
Immunity from interest rate swings
A big benefit of a recurring deposit is its immunity from interest rate swings. RD interest is fixed at the start of the tenure and maintained throughout the lifecycle of savings. The fluctuating market conditions do not have any impact on this interest rate and the investor would get an assured sum return at the value that was predicted at the beginning of the investment tenure. Thus, if a particular financial institution provides an interest rate of 6.35 percent on the recurring deposit value, then the interest would be computed at this particular rate and would not be affected by the changing market trends or any alteration in the fiscal body's policies regarding the offered interest rate. This saves investors from any tension on fluctuating market trends.
However, before investing in an RD scheme, it is advisable to study the terms and conditions along with the incentives offered by different financial institutions and choose the one that best suits your purpose. Some banks provide better interest rates for shorter periods, while others give a better interest rate for a longer duration. So, invest in one that fulfils your purpose for optimum benefits.
Recurring Deposit FAQs
How is the interest in the Recurring Deposit calculated?
Answer: The below given formula shows the method of interest rate calculation on a given RD scheme:
I=P*n(n+1)r /12*2*100 = P*n(n+1)r/2400 =P*n(n+1)r/2400
Here I is the interest, n is time in months, and r is the rate of interest per annum and P is the monthly deposit.
What is the formula to calculate the maturity amount on Recurring Deposits?
Answer: You can calculate the maturity amount by the below-given formulas:
Total sum deposited+ Interest on it= P(n)+I= P*n[1+ (n+1)r/2400] =P*n[1+(n+1)r/2400
Here, P is the monthly deposit, I is the rate of interest, n is the time in months, and r is the rate of interest per annum.
Can I change the deposit amount and the term in the middle of the RD tenure?
Answer: Once started, the deposit amount and the RD tenure cannot be changed.
What is the amount that I can invest in my RD account?
Answer: Usually, the minimum deposit amount under the RD scheme is 500 INR, although few financial bodies also allow you to deposit as low as 100 INR. In the case of the former, you can deposit regular RD value in the multiple of 500 INR, and in the case of the latter, you are allowed to deposit in the multiples of 100 INR. The post office minimum deposit can be opened with 10 INR and continues in multiples of 10.
What is the length of the RD tenure?
Answer: The minimum deposit tenure is of six months which increases by a multiple of three. The maximum deposit tenure is 10 years or 120 months. RD gives you the flexibility to define your term at your convenience. Nevertheless, once you fix the tenure, the period would be termed as 'lock-in' and you cannot withdraw before three months from the date of investment.
What kind of interest rate can I enjoy on my RD?
Answer: The Recurring Deposit interest rate is directly in correlation with the Reserve Bank of India's prime rate. The rate gets compounded and credit to the RD account every quarter. In January 2021, the minimum interest rate on RD given by banks is 2.50% while the maximum interest rate is 8.50%.
Can I get a partial and midterm withdrawal on my RD account?
Answer: No, you are not allowed for partial and midterm withdrawal.
Can I do a premature closure of the RD account?
Answer: Yes, you can prematurely close your FD account after the ending of the 'lock-in' period by levying a certain fine amount.
Will I lose any principal money if I withdraw prematurely?
Answer: There would be no loss on the principal money if you withdraw prematurely. The penalty levied would be on the initial interest rate portrayed which would be less than the original predicted amount.
Is there any beneficiary or nominee facility in the Recurrent Deposit Scheme?
Answer: Yes, all RDs have the facility to nominate a nominee of the beneficiary. The beneficiary name could be changed anytime during the RD tenure by engaging in small paperwork with the bank.
Can I open an RD as a joint account?
Answer: Yes, an RD can be opened as a joint account.
Can I open an RD for a minor?
Answer: Yes, a Recurring Deposit can be opened for a minor, that is for a person below 18 years of age.
Is there any additional benefit under an RD scheme for the senior citizens?
Answer: The senior citizens, that is the people who are more than or equal to 60 years, benefit from a higher interest rate which varies from 0.25-0.75 percent.
What additional benefits can I get from an RD?
Answer: In the majority of cases, you can get a loan up to 90 percent of the current deposit amount. The rate of interest on an RD loan is less than the standard rate of interest on a personal loan and is generally just 1% above the deposit rate paid by the bank on the RD deposits.
Is there a facility to avail a partial withdrawal from my RD account?
Answer: No, there is no facility for partial withdrawal. Further, there is no periodic payout on the interest incurred. You will receive the interest when the amount reaches its maturity, or if you decide to close it prematurely.
Is there any penalty for delayed monthly deposit payment?
Answer: There certainly is. The bank offers a specific interest rate for the RD on the assumption that the monthly deposits would be made on a pre-approved date per month. Hence, a delay of even a single day brings in an interest penalty for the entire month, or alternately you would have to pay a cash penalty that would be proportional to the monthly deposit.
However, if you make frequent default payments and the number of defaults increased to six outstanding instalments, then few banks would have the privilege to close your RD account. Here the final interest rate would be according to the RD agreement's premature redemption aspect.