Recurring Deposit: Secure Your Future

Features of a Recurring Deposit (RD)

RD offers a fixed interest on the invested amount at a specific frequency until the pre-determined term or upon maturity. At the end of the term, the amount upon maturity (your invested capital) and the remaining or accumulated interest are paid.

1. Recurring deposit schemes inculcate the habit of saving among the public.
2. The minimum amount that can be deposited varies among banks. It can be an amount as small as Rs.10.
3. The minimum deposit period is six months, and the maximum deposit period is ten years.
4.   The rate of interest is equal to that offered for a fixed deposit and is hence higher than any other savings scheme.  

1. Premature withdrawal  & mid-term withdrawals are not allowed by certain banks and NBFCs after charging a penalty, while some banks do not allow premature or mid-term withdrawals.
2. RD offers the additional benefit of taking a loan against the deposit, i.e., using the deposit as collateral. About 80%–90% of the deposit value can be given to the account holder as a loan. It varies from lender to lender.
3. The RD can be funded periodically through Standing Instructions, which are the instructions given by the customer to the bank to credit the RD account every month from their Current or Savings Account.

Most banks and non-banking financial companies (NBFCs) in India offer recurring deposit accounts with tenures ranging from six months to ten years.

Eligibility Criteria for Recurring Deposit

1. Any individual is eligible to avail RD.
2. Any minor above 10 years of age can open an RD account if they provide proof of their name.
3. Any minor below or equal to 10 years of age under the guardianship of a natural or legal guardian.
4. Any corporate company, proprietorship, or commercial organization.
5. Any government organization.

Documents Required

1. The application form can be obtained from the bank you select to open the RD account.
2. Passport-sized photographs of the applicant.
3. Identity proof and address proof of the applicant’s willingness to open the account.
4. KYC documents if the bank requests them. 
   

Top 3 Factors to Check Before Applying for an RD

A recurring deposit is an investment product made available by banks. The principal amount invested earns regular interest, and the lump sum is handed over to the depositor at maturity. Although they are a safe investment option and the return on investment is mostly guaranteed, there are some factors that  should be considered before investing money in RD account.

1. Interest Rate Offered by the RD Account : The interest rate offered by banks on term periods varies from bank to bank. The interest rate offered by different banks  generally ranges from 4.50% -8.25%. The rates of return vary depending on the tenure of the deposit selected. For medium-term deposits, the rates are generally the highest. For long-term deposits, the rates are usually slightly lower as the deposit holder stands to gain a higher overall interest rate.

2. Term Period of the RD Account :The term periods are divided into three categories. A method of earning on the capital invested in a RD account is to invest in a term period that provides high interest rates, with the term period being as short as possible.

Short-Term Tenure  -  A short-term tenure usually lasts from 6 months to a year.

Medium-Term Tenure  - A medium-term tenure usually lasts from more than a year to 5 years.

Long-Term Tenure  - A long-term tenure lasts from more than 5 to 10 years.

3. Facility of Premature Withdrawal in the RD Account : All banks provide the option of premature withdrawal. The interest payable will be calculated on the basis of the tenure completed. . The bank will also charge a premature withdrawal penalty. Therefore, while investing in an RD account, choose a bank that offers a high-interest rate and charges a low fee on premature withdrawal.

Factors to Keep in Mind while Opening an RD

Below are a few factors that one should keep in mind while opening a RD

1. Minimum account in RD : The minimum amount is Rs.1000. Increases in this investment are possible in multiples of Rs.100.
2. Interest rates : Interest is accrued each month on the balance in a recurring deposit account. Interest is earned at a rate that varies from 7% to 9%. Typically, senior depositors receive a  higher interest rate than ordinary depositors.
3. Tenure of RD : Most banks require a minimum tenure of six months. Depending on the depositor, these accounts can be opened for anywhere between six months and ten years.
4. Withdrawals : Similar to a fixed deposit is a recurring deposit. The RD amount cannot be withdrawn until it reaches maturity once it has been deposited. No portion of the account may be withdrawn.

How to Open an RD Account Online?

The following are the steps to open an RD account online:

1. Log in to your net banking portal.
2. Click on the ‘Open an e-RD account’ option.
3. Choose the account number from which the RD installment will be debited.
4. Go through the applicable interest rate and add a nominee to your RD account.

1. Once you have checked the maturity amount and agree to the terms and conditions, Send your online application.
2. Once your online application is sent, you will receive a confirmation message to your registered email address.

How to Open an RD Account Offline?

The following are the steps to open an RD account offline:

1. Visit the nearest bank branch where you have a saving account. 
2. Fill the offline application form with all relevant details, such as the installment amount, deposit tenure, nominee name, payment mode, and address.
3. Next, you must pay your first installment by cheque or cash and submit the application form. 
4. Once you have submitted your application form, it will be processed by the bank official. 

Renewals & Withdrawals of an RD Account

Interest will be provided to the account holder during the early closure of an RD for reinvestment in a term deposit without reducing the interest rate by 1% as a penalty. This only occurs if the deposit, following reinvestment, stays with the bank for a duration longer than the initial deposit's remaining duration.

However, if the account holder withdraws the money from the deposit before it matures, the interest rate that he or she will earn will be the one that applies to the time that the money has been in the bank, with a 1% penalty for early withdrawal. If the deposit is removed before the maturity period following reinvestment, a penalty of 1% will be assessed from the date of the original contract to the date of the premature withdrawal following reinvestment.

The penalty is assessed from the date of reinvestment to the date of premature withdrawal after reinvestment if the premature withdrawal is done after the deposit's due date for maturity. RD renewal and withdrawal policies differ among banks. 

Premature Withdrawal of an RD

1.  Suppose the account holder withdraws the deposited amount before its maturity. In that case, the rate of interest received will apply to the period for which the deposit has remained with the bank. The bank will also levy a 1% penalty for premature withdrawal recurring deposits.  
2. The interest rates offered by banks vary as per bank stipulations.
3. However, some banks would reduce the interest rate by 1% to 2% for the period during which the deposit remained in the bank in case of premature withdrawal.
4. Usually, the minimum lock-in period for an RD account is 3 months. If a premature withdrawal is made before this period, the account holder will earn zero interest and only the principal amount that was deposited will be refunded to him/her by the bank.
5. In addition to a penalty on interest, the depositor is not eligible for incentives offered by the bank on the recurring deposit.

Partial withdrawal of an RD

1. Partial withdrawal of RD is not allowed by banks. While most banks do not allow partial withdrawal, some offer an alternative in the form of a Loan or Overdraft facility made available by pledging the balance in the RD account as collateral.
2. Also, premature withdrawal is allowed at a 1% penalty for the period the deposit has remained with the bank.
3. Premature closure is allowed but with some penalty. While no bank allows you to withdraw partially, you can do so if you have a RD with a post office for at least a year. The withdrawn amount is considered a loan, which you can repay as a lump sum.
4. You can withdraw prematurely, but the interest paid will be lower than the base rate for the deposit tenure or that for the tenure the deposit has been with the bank. Some banks may subject the deposit to a penal interest (1-2 percent).
5. A Recurring Deposit account has a lock-in period of one month. Premature closure in less than a month will not earn interest. Only the principal amount will be returned.

Tax Saving RD

The interest earned by the depositor on a RD account is taxable. The amount of Tax Deductible at Source (TDS) is dependent on the income per annum of the depositor. The three different income slabs and the applicable TDS on it are

1. For Annual Income of Less than Rs.2.5 lakh  -  For people earning less than Rs. 2.5 lakh per annum, the TDS applicable is 10% of the interest earned on the account if the interest earned on the principal amount exceeds Rs.10,000. To avoid any payment of tax on the interest, it can be done so by claiming a refund of the TDS deducted. This can be done by submitting Form 15G to the income tax department.
2. For Annual Income between Rs.2.5 lakh and Rs.5 Lakh  -  For people earning an annual income ranging between Rs.2.5 lakh to Rs.5 lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000.
3. For Annual Income between Rs.5 Lakh and Rs.10 Lakh  -  For people earning an annual income ranging between Rs.2.5 lakh to Rs.5 lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000. The income tax to be paid by the person earning an annual income between Rs.5 lakh and Rs.10 lakh is 20% of the total income. The bank will deduct only 10% TDS which means when the person files the ITR, tax has to be paid at the rate of 10.3%.
4. For Annual Income between more than Rs.10 Lakh -  For people earning an annual income ranging between Rs.2.5 lakh to Rs.5 Lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000. The income tax to be paid by the person earning an annual income between Rs.5 Lakh and Rs.10 lakh is 30% of the total income. The bank will deduct only 10% TDS which means when the person files the ITR, tax has to be paid at the rate of 20.6%.

Benefits of investing in RD

Investing money in account is an intelligent investment, as the principal amount invested is almost guaranteed to give a return. The rate of return offered on it is also attractive. All this makes the RD a intelligent investment option.

Some other benefits of investing money in a RD account are:

1. A simple financial product to invest : It is one of the simplest financial products in the world to invest in. The concept of investing money in it is pretty simple. For anyone new to financial investment, experts always advise the person to invest their money in a recurring deposit account. Initial investments in recurring deposits also develop good investing habits for the individual.  
2. Guaranteed returns : Unlike equity and mutual funds, recurring deposits offer guaranteed returns on the principal amount invested in the short term.
3. Tenure and the minimum amount to be deposited :The tenure usually varies from 6 months to 10 years. The depositor can select the short-term, medium-term, or long-term period for investment in a RD account. Also, the minimum amount to be deposited to open an RD account is Rs.100 for public sector banks. It varies from Rs.500 to Rs.1,000 for private sector banks such as ICICI or HDFC bank, which is a small amount to deposit initially.

1. Anytime withdrawal : RD accounts also offer the facility to withdraw the account anytime. The bank might charge a small fee, but it is still a good option for the depositor to have in case they need the deposited money and the return on it urgently.
2. Loan against deposit : Banks also provide the facility of loans against recurring deposits. Depending on the bank, a depositor can avail of a loan amount equivalent to 90-95% of the total money deposited in the RD account.
3. Flexible recurring deposits : A flexible recurring deposit is a scheme in which a person can invest any amount of money (more significant than the minimum amount) at any time interval. Some banks also allow the facility for the depositor to skip an installment without paying any penalties.

Recurring Deposits for NRI/NRE

A recurring deposit account is one of the best investment options for NRIs/NREs. Huge savings can be made using small monthly investments. NRIs can either invest in either NRO or NRI Recurring Deposit accounts.

1. NRE RD Accounts - In this savings option, the investments towards deposit installments are credited from the NRE accounts. An NRE is a non-resident external account where the accrued is exempted from taxes in India. This account can also be moved back to the investor's home country without hassle.
2. NRO RD Accounts -  For these accounts, the investments towards the deposit installments can come either from NRE or NRO accounts. NRO are non-resident ordinary accounts. The interest from NRO RDs is taxable at 30%, plus the additional CESS. This is repatriable, subject to specific featured requisites.

Banks Providing Flexi RD

Flexi Recurring Deposit schemes allow the depositor to invest a flexible sum of money depending on his convenience. They allow the depositor to choose the core investment amount and the flexible installments in multiples of the core installment amount. For example, if the depositor chooses Rs.500 as the core amount, he can deposit Rs.500 or multiples for his next deposit.

This scheme offers depositors a choice on how much to invest depending on their means every month while maintaining a stable interest rate. The interest rate payable is fixed for the core amount, while the interest on the core multiples amount would be calculated based on the duration of the investment.

Several banks offer flexi Recurring Deposit schemes with varying tenures and conditions. Some of them are listed below:

1. SBI Flexi Recurring Deposit
2. PNB Swechha Jama Yojna/Flexi RD Scheme
3. Bank of India Star Flexi Recurring Deposit scheme
4. Bank of Baroda Flexible Recurring Deposit Scheme

How to Close an RD Account

RD can be closed easily through either of the following methods depending on your bank:

Offline - Visit your bank branch and submit a request for the closure of your RD account.

Net banking -  Log into your bank's net banking facility and follow the steps required to close your RD account.

Mobile banking - Log into your bank's mobile application and follow the steps required to close your RD account.

In all instances given above, the amount at closure will be deposited into the same saving bank account from where the recurring deposit amount was being collected.

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