Recurring Deposit (RD)

Introduction

India is progressively becoming a central investment hub where more individuals seek low-risk investment tools. 

One such tool with assured yet not-so-high returns is RD. RD’s full form is a Recurring Deposit. Considered a highly flexible investment tool, an RD allows individuals     to choose the investment tenure and amount at their convenience. 

Anyone who fails to have a lump sum amount in their bank or other savings account to meet their short-term financial goals can use this investment tool. 

Whether in a bank or any NBFC, you can deposit a small portion of your salary or income into the RD account to start ahead with your investment and savings plan. 
 

What Is a Recurring Deposit

Many new investors who plan on investing and saving money at the same time while enjoying assured returns often search ‘what is recurring deposit’ on the internet. 

These people want to learn what this investment tool is, how it differs from any FD, and how it can be beneficial. If you’re one such investor, your search ends here. 

Individuals who use recurring deposits can invest and set aside as much money as they choose each month. Between FD and RD, this is where the main differences lie. 

Whether looking for a short-term or long-term investment, your money will be safe and channelled into corpus production with this investment tool. 

The maximum investment tenure for recurring deposits is ten years, whereas the minimum is only six months. The only work left for the investors to do is determine a minimum amount they’re ready to invest on a monthly basis over the selected tenure for assured profitability. 

Over the term, the interest rates are fixed. The principal is paid out at maturity, just like with a fixed deposit, and you can decide whether to get your interest payments in periodic intervals or all at once.
 

How a Recurring Deposit Works

Much like FDs, recurring deposits (RDs) allow you to make recurring monthly investments, such as INR 1000 per month. Together with every other deposit made each month, this RD investment matures on a specific date in the future. 

The customer is informed of the maturity amount whenever they open their RD Account, presuming that the monthly payments would constantly be made on time. 

Every delayed instalment will result in a reduction of the account’s interest obligation, which will prevent it from accruing enough interest to cover the maturity amount. Hence, a penalty corresponding to the disparity in interest–with a predetermined rate–will be subtracted from the maturity value.

You must note that TDS is applicable on the Recurring Deposit (RD) amount, and the RD maturity will differ if the bank or NBFC deducts TDS. 

Let’s assume you earned an interest of over INR 20,000 in a financial year from your RD. In that case, the bank or NBFC (where you have the RD account) will deduct TDS at a flat rate of 10%. That’s because a Recurring Deposit’s interest must be taxed at the tax rate applicable to the RD holder, which is based on their tax bracket.
 

Features of Recurring Deposit Account

Now that you know the recurring deposit meaning let’s check some of the primary features of a recurring deposit account in today’s banking environment: 

● Fixed Income Investments: 

Recurring deposits are considered a popular type of fixed investment spending for a stipulated period with assured return on maturity. The bank or NBFC informs the interest rate on the recurring deposits before the onset of the investment. Furthermore, throughout the duration of the deposit, the interest rates remain constant.

● Minimum Investment:

To open a recurring deposit account, you must make a minimum investment of INR 100 every month. However, RDs are only ideal for investment (in terms of the return) if you hold an excess income of at least INR 1000 every month. 

● Time Period:

A recurring deposit ((RD) account can be opened for a period of no less than six months and a maximum of ten years. A recurring deposit, or RD for short, allows you the freedom to select the timeframe that works best for you.

● High-Interest Rate:

Regular savings accounts offer lower interest rates than recurring deposits. When it comes to RDs, the interest is typically compounded every quarter.

● Lock-In Period:

Depending on the lender, the minimum lock-in period of a recurring deposit account can be 30 days, whereas the maximum can be three months. You won’t earn any interest if you withdraw the investments during this lock-in period. 

Premature Withdrawals:

Under a recurring deposit account, consumers can withdraw funds prematurely with an applicable penalty fee.
 

Types of Recurring Deposits

Of course, there are the typical RDs that let you invest money to earn interest and multiply your corpus. Besides that, there are other types of RDs available in the market, too, each catering towards the explicit needs of different investors. 

● Minor Recurring Deposit Account:

Underage people will have these accounts made in their names, but only with the supervision and consent of their legal guardians or parents. 

Like traditional RD accounts, a predetermined monthly amount and term will be set when the account is set up. The returns may well be similar to or somewhat higher than those of conventional RD accounts.

● Recurring Deposit For Senior Citizens:

The senior citizens’ program offers higher and more attractive interest rates than the normal accounts while having the same perks and features as a standard RD. 

Senior individuals can easily satisfy their short-term financial needs without an ordinary income by withdrawing a larger maturity value, thanks to the interest being compounded quarterly in accordance with the applicable rate of interest.

Typically, the higher interest rates provided by different banks or NBFCs on the senior citizen recurring deposit programs range from 0.25 to 7.5 per cent over the rates for standard deposits.
Recurring Deposit For NRE/NRI:

Among the best investment possibilities for NRIs is RD proposals. Even a tiny recurrent monthly commitment can result in significant financial rewards. NRIs may enroll in RD schemes either via an NRO or NRE RD account.
 

Eligibility and Documents Required for a Recurring Deposit

Eligibility:

The answer to ‘what is RD’ should be clear by now. If so, let’s come to the eligibility criteria Banks or NBFCs will want to see while processing your application for opening an RD account. For starters, you can only open a recurring deposit account if you hold a savings account. 

Other eligibility criteria for a recurring deposit are as follows: 

●    Savings Account: As mentioned, holding an individual savings account in any RBI-registered bank or even in the Post Office is crucial to open an RD account. 

●    Age: Any minor above the age of 10 can enrol themselves into an RD investment plan by opening an RD account. However, minors equal to or less than ten years of age will need legal guardianship to open a recurring deposit account. 

●    Organisations: Not only individual minors, adults, and senior citizens, but organisations and entities can also open a recurring deposit account. From government organisations to commercial, proprietorship and corporate firms, everyone can open an RD account. 
 

Required Documentation:

To open a recurring deposit (RD) account, you’ll need the following requisite documents: 

●    Recurring Deposit application form (offline or online)
●    ID Proof such as your Aadhaar card, Voter ID card, Passport, PAN card, etc. 
●    Address Proof such as your Aadhaar Card, Utility Bills, etc.
●    Passport-size photographs with clear image quality
●    KYC Documents (If asked by the bank or NBFC)
●    Details of your individual savings account (account number, IFSC code, etc.). 
 

Interest Rates and Returns on a Recurring Deposit

Today, multiple banks and non-banking financial institutions across the nation offer recurring deposit investment choices. This is why RDs come with highly competitive rates of interest. 

The interest rates can differ from the range of 5% to 8% based on the existing market trends at the time of opening the RD account. However, for most banking institutions, the average interest rate on RD accounts ranges between 6% to 7%. 

Also, the investor’s age plays a key role in determining the RD interest rate. For example, banks or NBFCs offer higher rates of interest to senior citizens when compared to others. The type of RD scheme, RD tenure, and the invested funds determine how much interest rate you can get. 

Furthermore, calculating the interest is a good way to determine how much return you will get from your recurring deposit. You can either find the returns using an RD calculator or manually via a formula. Here’s how to calculate your RD interest returns manually: 

M = R [(1+i) n – 1]/ 1 – (1+i) -⅓ [Here, ‘R’ is the monthly instalment, ‘i’ is the interest rate/400, ‘n’ is the number of quarters, and ‘M’ is maturity value]
 

Tax Implications of a Recurring Deposit

A recurring deposit account holder is liable to pay taxes on the interest they receive. Their annual income determines how much tax is deductible at source (TDS). The TDS that applies to each of the income brackets is as follows:

If the interest accrued on the principal investment surpasses INR 10,000 and your annual income is no more than INR 2.5 lac, a 10% TDS will be applicable on the interest income. 

Submit Form 15G, claim a TDS refund, and avoid the hefty tax payment. 

The TDS applicable to someone with an annual income between INR 2.5 lac to INR 5 lac and with interest income above INR 10,000 is the same as for someone with income less than 2.5 lac – 10% TDS. 

However, you’ll have to pay 20% of your total annual income if your income is between INR 5 lac and 10 lac. For someone with income above INR 10 lac, a 30% tax liability will be imposed on their total income.
 

Advantages of Investing in RD

With an in-depth understanding of the recurring deposit meaning, you now have a concrete idea of what it entails and how it works. But how can opening an RD account benefit us? Let’s find out. 

● Safer Form of Investment:

A recurring deposit or RD comes with minimal to no risk at all. If you want to keep your savings safe while earning profits out of it, an RD account is the right investment choice for you. The RBI-regulated investment scheme offers maximum safety to people by not changing the interest rate for the entire investment term. 
Earning While Saving:

Your funds will expand with a recurrent deposit since the interest earned builds up over time. Hence, you receive higher interest with a longer term.

● Lump Sum Withdrawal:

At the conclusion of the term, a lump sum payment is made for the maturity value. This sum comprises your contributions as well as the interest you’ve received. You can use the lump sum to accomplish your financial goals.

● Loans Against Recurring Deposit Account:

What adds more power to the definition of ‘what is RD’ is its ability to serve the purpose of collateral for borrowing loans against them. When you borrow a loan against your RD account, you even get a lower interest rate compared to what you get on other types of loans. 

Who Can Invest in a Recurring Deposit? 

For salaried individuals, investing in a recurring deposit program is an excellent alternative because they aren’t obligated to make a one-time, lump-sum investment like they would with a fixed deposit. 

In RD investment opportunities, the customer only requires setting aside a preset portion of their monthly income. However, this investment scheme is open for all, from minors (with legal guardianship) and adults to senior citizens and organisations (government and corporate).
 

Factors to Consider Before Opening RD Account

When opening an RD account, consider the following factors: 

● Investment Tenure: 

Firstly, determine how much money you want to invest in a monthly recurring deposit investment scheme. Once done, look for the RD investment tenure offered by the bank or NBFC. The minimum RD investment term should be six months, and the maximum is ten years. 

Changing or modifying the tenure after opening the account won’t be an option until maturity. So, choose the tenure wisely while ensuring to get the maximum profits in return. 

● RD Interest Rate:

A monthly interest payment is made on your investment. The interest rates could differ from one bank to another. The recommended course of action is to choose the recurring deposit with the highest interest rate.

● Tax Implications: 

The interests accrued from a recurring deposit investment are subject to taxation. If the interest earned from the RD investment until maturity is INR 40,000, there won’t be any tax deduction. However, you must inform the bank or BFC that your income is below the tax slab by submitting form 15g. 

● Withdrawals:

Remember that partially withdrawing from a regular deposit is not permitted. Nevertheless, there are some consequences associated with premature withdrawals.
 

Conclusion

RDs, or Recurring Deposits, are considered the most popular, safe, and reliable form of investment among Indians of all ages. Opening an RD account has become a more profitable approach to earning higher interest returns than what one earns from a regular savings account. 

With more and more banks and NBFCs offering recurring deposit schemes in the market, things have become simpler and more lucrative for regular investors. From highly competitive interest rates to minimal documentation, a lot has become simpler with the surging demand for this investment scheme. 

A recurring deposit is an ideal solution if you seek higher interest income over a stipulated period without any hassle.