Recurring Deposits (RD): Popular Investment Option in India

Recurring Deposits (RDs) are offered by banks and financial institutions across the country and provide a safe and convenient way to build savings over time. While RDs have their advantages, such as guaranteed returns and low minimum deposit requirements, there are also disadvantages to consider, such as lower interest rates and tax implications. The following sections will explain the concept in detail. 

What is a Recurring Deposit?

Recurring Deposit refers to a type of scheme where people can place a fixed amount of money periodically for a predetermined period. The deposit amount, tenure, and interest rate are finalised at the time of opening the RD account. RDs are considered a safe investment option as they are backed by the credibility of banks and financial institutions.

Features of a Recurring Deposit Account

Here are some key features of an RD account.

• Regular deposits: With an RD account, individuals can make regular monthly deposits of a fixed amount. These deposits can be automated, ensuring a disciplined approach to savings.

• Fixed tenure: RDs have a predetermined tenure, which can range from a few months to several years. The tenure is chosen by the depositor at the time of opening the account.

• Fixed interest rate: The interest rate on RDs is fixed at the time of account opening and remains constant throughout the tenure. This provides predictability and stability in the returns earned on the investment.

• Interest calculation: The interest on RDs is calculated using the quarterly compounding method in most cases. This means that the interest is added to the principal amount at the end of each quarter, leading to cumulative growth over time.

• Partial withdrawals: Some banks allow partial withdrawals from RD accounts in case of emergencies or financial needs. However, there may be restrictions, penalties, or reduced interest rates associated with premature withdrawals.

• Nomination facility: RD accounts provide the option to nominate a beneficiary who will receive the deposit and interest in case of the account holder's demise. This ensures a smooth transfer of funds and avoids legal complications.

• Loan facility: RDs can be used as collateral to avail loans from the bank. The loan amount can be a percentage of the RD value, providing liquidity and flexibility to investors.

• Auto renewal: At the end of the RD tenure, banks may offer an auto-renewal option where the RD account is automatically renewed for another term unless the account holder instructs otherwise.

• Taxation: The interest earned on RDs is taxable as per the depositor's income tax slab. TDS (Tax Deducted at Source) may be applicable if the interest exceeds a certain threshold.

Advantages of Recurring Deposits

Recurring Deposits in India offer several advantages to investors. Here’s a list.

• Systematic savings: RDs promote disciplined savings by allowing individuals to deposit a fixed amount regularly. This helps inculcate a habit of saving and ensures a consistent flow of funds towards the investment.

• Flexibility: RDs offer flexibility in terms of deposit amount and tenure.

• Guaranteed returns: RDs provide guaranteed returns as the interest rate is fixed at the time of account opening. This offers stability and predictability to investors.

• Low minimum deposit: Most banks in India offer RDs with a low minimum deposit requirement for better accessibility. 

• Loan facility: RDs can also be used as collateral to avail loans from the bank. This feature provides liquidity to investors in times of financial emergencies.

Disadvantages of Recurring Deposits

While Recurring Deposits have their advantages, there are also some disadvantages to consider.

• Lower interest rates: RDs are known to feature lower interest rates compared to other investment options such as mutual funds or stocks. 

• Locked: The money deposited in an RD is locked for the predetermined tenure. Premature withdrawal may attract penalties or reduced interest rates.

• Inflation risk: RDs are subject to inflation risk. If the interest rate offered on RDs is lower than the inflation rate, the real value of the investment may erode over time.

• Tax implications: The interest is taxable as per the depositor’s income tax slab. This can reduce the overall returns on investment.

How to open a Recurring Deposit online

Opening a Recurring Deposit online is a simple and convenient process. Here's a step-by-step guide to help you get started.

1. Research various banks and financial institutions offering RD schemes. Compare the interest rates, minimum deposit requirements, and terms and conditions.

2. Select the bank or financial institution that best suits your requirements.

3. Visit the bank’s website/app.

4. Look for the section related to RDs on the website.

5. Click on the option to open a RD account.

6. Fill in the necessary details, including personal information, deposit amount, tenure, and nominee details.

7. Share documents, such as identity proof, address proof, and PAN card details.

8. Review the details entered and confirm the application.

9. Transfer the initial deposit amount from your linked bank account to the RD account.

10. Once the deposit is successful, you will receive a confirmation email or SMS with the RD account details.

Who should open a Recurring Deposit?

Recurring Deposits in India are suitable for various individuals, including the following. 

• Salaried employees: Individuals with a regular income can benefit from RDs as it helps in systematic savings.

• Students: Students who receive pocket money or have a part-time job can start building their savings through RDs.

• Retirees: Retirees looking for safe investment options with regular returns can consider opening RDs.

• First-time investors: RDs are an ideal choice for first-time investors as they offer a low-risk investment option.

Types of Recurring Deposits

There are different types of Recurring Deposits available in India, let's explore some popular types.

• Regular Recurring Deposits: These are the standard RDs offered by banks, where investors deposit a fixed amount regularly.

• For Senior Citizens: Designed specifically for senior citizens, these RDs offer higher interest rates and additional benefits.

• Flexi Recurring Deposits: Flexi RDs provide the flexibility to deposit variable amounts each month, allowing investors to save more when they have surplus funds.

• NRI Recurring Deposits: Non-Resident Indians (NRIs) can open NRI RDs, which offer attractive interest rates and the convenience of managing the account from abroad.

• Special Recurring Deposits: Some banks offer special RDs targeting specific customer segments, such as children or women.

Eligibility criteria for Recurring Deposit

Here are the general eligibility criteria for opening a Recurring Deposit, the exact criteria may vary from one bank to another. 

• Age: The applicant must be at least 18 years old. Some banks may allow minors to open RD accounts, but with certain conditions and restrictions.

• Residential status: RDs are available for both resident Indians and non-resident Indians (NRIs). However, the eligibility criteria and features may differ for NRIs.

• KYC (Know Your Customer) compliance: To comply with regulatory guidelines, individuals need to complete the KYC process by submitting relevant documents. 

• Bank account: Applicants must have an active savings or current bank account with the bank where they wish to open the RD account. The RD instalment amount will be automatically debited from this account.

• Minimum deposit amount: RDs have a minimum deposit requirement that varies across banks. The applicant must be able to meet the specified minimum deposit amount.

Important factors to check before applying for Recurring Deposit

Here are some key factors to check before applying for a Recurring Deposit. 

• Interest rate: Check the interest rates offered by different banks and financial institutions. Look for competitive rates that provide attractive returns on your investment. Higher interest rates can significantly impact the growth of your savings over the RD tenure.

• Tenure options: RDs come with different tenure options (6 months to 10 years). Choose a tenure that suits your financial goals and liquidity needs. Longer tenures generally offer higher interest rates but lock in your funds for a longer period.

• Minimum deposit requirement: Check the minimum deposit requirement for opening an RD account. Ensure that you can comfortably meet the minimum deposit amount specified by the bank. Some banks may have different minimum deposit requirements for different tenure options.

• Penalties for missed instalments: Understand the penalties or consequences for missed instalments. Life can be unpredictable, and there may be situations where you might not be able to make the monthly deposit. Check the bank's policy on missed payments, penalties, and the impact on your RD account.

• Premature withdrawal rules: Familiarise yourself with the rules and charges for premature withdrawal of RD funds. There may be penalties or reduced interest rates for early withdrawal. It's essential to know the implications in case you need to access your funds before the maturity of the RD.

• Loan facility: Some banks offer loan facilities against RDs. If you anticipate a need for a loan in the future, check if the bank provides this feature and the terms and conditions associated with it.

• Taxation: Ensure you are aware of the tax liability and factor it into your financial planning.

• Credibility and reputation: Consider the credibility and reputation of the bank or financial institution. Look for well-established banks with a good track record to ensure the safety of your deposits.

Difference between Systematic Investment Plan and Recurring Deposits

Here’s a table highlighting the key differences between a Systematic Investment Plan and a Recurring Deposit.

Check out: RD Calculator

Frequently Asked Questions (FAQs)

Here are some FAQs related to Recurring Deposits in India.

What is the minimum deposit required to open a Recurring Deposit in India?

The minimum deposit requirement can vary from bank to bank. It can range from as low as Rs. 500 to Rs. 1,000.

Can I withdraw money from my Recurring Deposit before the maturity period?

Yes, premature withdrawal is allowed; however, it may attract penalties and reduced interest rates.

Are the interest rates on Recurring Deposits fixed or variable?

The interest rates are fixed at the time of account opening and remain the same throughout the tenure.

Can I avail a loan against my Recurring Deposit?

Yes, many banks offer loan facilities against Recurring Deposits. The loan amount can be a percentage of the RD value.

When it comes to taxation, what’s the situation regarding interest earned on Recurring Deposits?

The interest earned is taxable as per the individual's income tax slab.

Can I convert my Recurring Deposit into a fixed deposit?

Some banks allow the conversion of RDs into fixed deposits. However, it is subject to the terms and conditions of the bank.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.