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Recurring Deposit – Definition Revisit

We have often came across various recurring deposit schemes for various banks through advertisements, talks, advises, etc. Let’s just revisit the term closely.

Recurring Deposit is made up of two words

  1. Recurring: The literal meaning is timely occurring or periodic in nature
  2. Deposit: Investing money for a special purpose or putting money aside with someone in order to use these money later

Thus, Recurring Deposit in a bank is the scheme in which we investors put periodic money in a bank deposit in order to earn interest along with our initial money invested, also called principal.

Recurring deposit interest rates are much higher compared to Savings Account’s interest rate.

Let’s understand the process of depositing and return

Almost every bank offers taking recurring deposit monthly. Hence we need to deposit a certain sum of money monthly with the bank in our recurring deposit account. Whenever we open a Recurring deposit account with a bank, we get to choose three things.

  • Monthly Deposit Amount – The sum of money which we wish to deposit every time. The amount can range from as low as Rs. 10 to as high as Rs. 15 lakhs per month.
  • Tenure of the Recurring deposit – This the period till which we would be keep investing the monthly deposit amount. The minimum period is 6 months, and then other periods are in multiple of 3 months thereafter. However, the maximum tenure for the recurring deposit is 10 years.
  • The date of depositing or auto deduction from account: On this date of a month the selected monthly deposit amount needs to be transferred to the recurring deposit account or it gets auto deducted from the bank account.

Also the bank offers certain interest rate which is in accordance to the tenure of deposit. This interest rate then remains fixed throughout the tenure of the recurring deposit.

Why Recurring Deposit Should be Considered?

We often find ourselves much easier to invest small amount with banks. This eases our liquidity pressure and we just need to save a little amount for the recurring deposit. Unlike Fixed Deposit our huge sum of money is not locked up in the bank. The fixed deposit option may force us on any many finance demanding occasion compared to Fixed Deposit.

Also unlike other investment options, the interest rate do not change. The interest rate remains the same throughout the tenure of the deposit at a rate which was decided at the initiation of recurring deposit.

Types of Recurring Account

Banks may provide mainly two types of recurring deposit account, they are:

  • Regular Recurring Account: These are the common recurring deposit account. Tenure, monthly deposit etc. are fixed. These parameters are chosen by the account holder and they remain fixed throughout the tenure. If any monthly deposit remains unpaid, bank may levy penalties.
  • Flexi Recurring Account: Flexi account is special type of recurring deposit that offers flexibility in choosing amount we intend to deposit each month. A core amount is fixed, but this can be changed according to the account holder’s availability of funds. One thing that is important to note here is that the interest rate offered are lower than those offered on regular recurring account.

Features of Recurring Deposit

Following are the main features of Recurring Deposit

  1. Higher interest rates compared to Savings Account.
  2. These schemes do not allow pre-mature withdrawal. However, we can break our recurring deposit at any time before maturity. This process might invite small penalty by bank. The amount of penalty differs from bank to bank.
  3. Recurring Deposits can also act as collateral for availing loan from the bank.
  4. We can automate the payment of recurring deposit by providing a standing instruction to the bank.
  5. Recurring Deposit schemes are very effective method investing regular savings and earning high returns.

Recurring Deposit Calculator

Groww Recurring Deposit calculator help investors like us to calculate the net return along with interest amount for the entire recurring deposit tenure. This calculator is very useful for comparing Recurring Deposits schemes in various banks.

Calculation Basics

Following formula is used by various banks to calculate Maturity value of our deposit. This formula is widely used by banks to calculate interest amount on recurring deposit.

M= R[1+in-1]1-(1+i)-13

Here,

M = Value at Maturity

R = Monthly Installment

i = quarterly rate of interest in basis point. Or if the rate of interest is mentioned annually, we can obtain i as i = annual interest rate/400.

n = number of quarters.

The formula might look intimidating, hence let’s see conceptually.

Let’s understand through an example. If we deposit Rs. 1,000 monthly for a period 1 year, and the bank has agreed to give interest at 7%.

Conceptually, each monthly deposit in our RD will earn interest with respect to the period it is associated with the tenure. For example the recurring amount paid in the first month is associated with recurring deposit for 12 months. Similarly, the second deposit will be associated for 11 months, third deposit for 10 and so on. Each monthly deposit will earn certain sum of money for the associated period. The net mature amount is the cumulative maturity amount of all these monthly deposits.

This is shown in the table below for the amount and period mentioned above:

Annual Interest 7.00%
Monthly Interest 0.57%
   
Monthly Deposit Period Effective interest Rate Mature Amount
1000 12 7.0% 1,070.00
1000 11 6.4% 1,063.98
1000 10 5.8% 1,058.00
1000 9 5.2% 1,052.05
1000 8 4.6% 1,046.14
1000 7 4.0% 1,040.26
1000 6 3.4% 1,034.41
1000 5 2.9% 1,028.59
1000 4 2.3% 1,022.81
1000 3 1.7% 1,017.06
1000 2 1.1% 1,011.34
1000 1 0.6% 1,005.65
       
Net Maturity Amount   12,450.30

Well, we won’t need to calculate every time we want to make any comparison. Thankfully, we can use Groww’s Recurring Deposit Calculator. We just need to input few parameters and then just make a click. The results get automatically ready.

Eligibility Criteria for Recurring Deposit

Recurring Deposit can be open by both Indian Citizens as well as NRIs. Almost every bank in India allow person having Indian citizenship or is a part of HUF (Hindu Undivided Family) or even Non Residents of India for RD. Also, some banks even allow children to open RDs in presence of their guardian(s).

Account holders above 60 years of age are provided higher interest. Also, the tenure and the minimum-maximum monthly deposit amount are offered as per individual’s bank policy. Hence, these parameters differs from bank to bank. But, generally, it has been observed that the interest rate provided by the bank for senior citizens for recurring deposit account is 0.5% higher than the usual recurring deposit account of the same tenure.

Tax Treatment for Recurring Deposits

Tax Deduction at Source or TDS was not applicable to Recurring Deposit till May 2015. But, from June 1 2015, TDS is applicable on the interest earned in the Recurring Deposit. The same is applicable for the Fixed Deposit. If an account holder does not want to get his/her tax deducted they need to take the following steps

  1. Submit form 15G or 15H. Form 15H is for the applicants other than those applying as co-operative society or company.
  2. Submission of Exemption certificate under Section 197
  3. Submission of any other tax exemption certificate

All the forms mentioned above has to be submitted to the bank every financial year and for each recurring account one holds.

However, for Non-Resident External Recurring Deposit Accounts interest amount is tax exempted.


 

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