Recurring Deposit

Recurring Deposit (RD) – Types, Features, Returns & Benefits

Among the low-risk investment tools with moderate and assured returns, Recurring Deposit (RD) is a popular investment option in India. It comes with an option of flexibility for customers in the choice of investment amount and tenure accompanied by multiple other benefits.

Available in flexible tenure options ranging from 6 months to 10 years, this investment tool offered by multiple banks and NBFCs helps channelize monthly savings for long or short-term corpus creation.

Investors can thus choose a minimum amount to be invested every month over the term for assured wealth generation.

If you do not have a lump sum amount to meet short-term goals, depositing a small share of your income to the RD account every month serves the purpose well.

A brief overview of Recurring Deposits

You can opt to open your Recurring Deposit account with multiple financial institutions like banks, NBFCs or even post office. While the minimum amount of investment may vary from one institution to another, you can usually start with a considerably small amount, say Rs. 500 every month, as per your budget.

However, the right RD would be the one that allows for a suitable investment amount given your capacity and provides a maturity option that rightly fits your short or long-term funding plans.

You must, therefore, make sure to consider the available flexibility when choosing the financial institution to invest with.

Features of Recurring Deposit

RD allows you to earn fixed interests on the amount invested at frequent intervals until the investment matures or a pre-determined term ends.

The total amount (i.e., the capital invested and the interest accumulated) is disbursed to the investor after the maturity period completes.

Here is a table that provides a brief overview of RD features:

RD Features  Applicability
Rate of interest Between 5% to 8% (variable from one bank to another)
Amount of minimum deposit From Rs. 10
Tenure of investment Between 6 months and 10 years
Frequency of interest calculation Usually every quarter
Mid-term or partial withdrawal Not allowed
Premature account closure Allowed with penalty

Now, take a look at the features of RD in details.

  • Minimum investment

The minimum investment amount varies from one bank to another. You can open this account with an amount as small as Rs. 10.

  • Deposit term

The minimum deposit tenure starts from 6 months. You can choose a suitable period of deposit with a maximum tenure stretching up to 10 years.

  • Interest rate

The interest rate offered on RDs is always higher than the interest earned through a savings account. The interest rates offered on RDs are also similar to what you can earn through FDs.

However, the periodic investment instead of a lump sum amount makes it suitable for individuals who aim to create a corpus through their monthly savings.

  • Withdrawal on maturity

Withdrawal from this account is allowed only after it attains maturity. However, if you choose to withdraw the amount before the maturity period ends, it attracts a premature penalty.

  • Loan against deposit

You also have an option to avail a loan against the RD. Banks may allow up to 95% of the deposit amount as a loan against deposit used as collateral.

  • Standing instructions for monthly deposits

If you find it inconvenient to deposit the amount periodically, banks also facilitate such payments as deductions from a linked account (savings or current) upon standing instructions.

Returns on RD – Interest earned

Almost all banks in the country along with several other institutions offer Recurring Deposit investment options. The interest rates are, thus, highly competitive. Depending on the prevalent market trends at the time of account creation, the interest rates may vary anywhere between 5% and 8%. The average interest rates, however, hover around 6% to 7% for most banks.

Interest rates in RD also vary depending on the investor’s age. For instance, senior citizens can enjoy the benefit of higher interest rates as against the existing interest rates for regular RD schemes. Also calculate your rd returns by using RD Calculator.

Types of Recurring Deposits

Apart from the regular RDs that you can invest in to earn interest income and grow your corpus, RDs are also available in other types, suitable for different investors. Take a look.

  • RD for senior citizens

Carrying the same features as a regular RD, the scheme for senior citizens brings higher interest rates than the regular accounts. The interest is compounded quarterly as per the applicable interest rate, thus helping senior citizens withdraw a higher maturity amount and meet their short-term funding needs efficiently in the absence of a regular income.

Generally, the additional interest rates offered by various banks on senior citizen RD scheme range between 0.25% and 0.75% above the regular deposit rates.

  • RD for NRI/NRE

RD schemes are one of the best investment options for NRIs (Non-Resident Indians). Substantial returns through an investment can generated with a small recurring investment amount per month. As an NRI, one can invest in RDs either through an NRE or NRO RD account.

  • Through NRO accounts:NROs are non-resident ordinary accounts where the investment is repatriable provided the account holder fulfils the requisites. Also, the investment in these accounts can come only from an NRE or NRO account. Interest earned through these accounts is taxable at 30% slab and also attracts additional CESS.
  • Through NRE accounts: Investment or deposit to these accounts is allowed only through an NRE account. NRE represents a non-resident external account and income earned through it is not taxable in India. Also, the facility of hassle-free account transfer to the investor’s home country is available for this account.
  • Flexi RD

Flexi RD deposit schemes allow an individual to invest a flexible amount as per his/her convenience. While the core investment amount is pre-decided in this type of deposit, the account holder has an option to deposit amounts in multiples of the core amount.

For example, if the core deposit amount is decided at Rs. 1,000, the investor can choose to deposit in its multiples, i.e., Rs. 2,000, Rs. 3,000, etc. While the investment flexibility is available, interest on the amount is calculated at a stable rate. Interest calculation on the core multiples are done based on investment duration.

Several banks offer flexible RD schemes with the varying tenure as well as conditions.

RD renewals and deposits

Conditions regarding a premature or partial withdrawal of RD are applicable if you initiate withdrawals before the tenure ends.

  • For premature withdrawal
  • If you initiate premature RD closure before the term ends, you will enjoy interest for the deposit period. Also, a premature withdrawal penalty of 1% is levied by the bank.
  • FD schemes come with a lock-in period, the minimum of which is usually three months. If you withdraw before this period, interest earned will be zero, and you will receive only the amount deposited.
  • Premature RD withdrawal also makes you ineligible for any additional incentives applicable otherwise.
  • For partial withdrawal
  • Banks do not allow partial withdrawal of the RD amount.
  • Some banks, however, offer an overdraft or loan against the deposit as collateral. You have to repay this loan in a lump sum.
  • Post office RDs, however, allow partial RD withdrawal if the account is maintained for over a year.

Benefits of RD investment

As the return of principal amount investment along with accumulated interest as per the applicable rate is guaranteed, RD becomes a smart, risk-free investment option. Check out some other benefits it brings.

  • Useful in fulfilling financial goals

RD is an entirely risk-free investment whose guaranteed returns make it suitable for fulfilling both short and long term goals. Hence, RD may be just the right investment option if you require financial assistance to meet the below-mentioned requirements.

  • The cost of higher education for your kids.
  • Expenses on home renovation and furnishing.
  • Vacationing abroad.
  • Expenses incurred on marriages.
  • Inculcates savings discipline

As a Recurring Deposit scheme requires you to make fixed monthly investments, it helps inculcate a savings discipline. It is beneficial more so for salaried individuals who have multiple financial goals to fulfil with a fixed income.

  • Immunity from interest rate swings

RD interest is calculated at a fixed rate throughout its tenure. So, if your bank offers an interest rate of 6.50% on your RD, interest calculation will be done at this rate irrespective of the changing market trends or change in your bank’s policies regarding interest rate offered.

You, therefore, do not have to worry about any RD interest rate reductions.

The interest income from Recurring Deposit is taxable, with TDS deducted by the bank at the rate of 10% if the income is above Rs. 10,000.

In case your annual income is below the minimum exemption limit, you can save on this tax by providing form 15G to your bank. For senior citizens, form 15H is applicable.

Choose your RD scheme wisely before investing and also check the terms, conditions and incentives offered by different banks to decide on the best option. Compare the offers carefully to opt for the one with the highest returns in the shortest period for optimum earning.