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Recurring Deposit: All You Need to Know Research Team | Posted On Tuesday, March 05,2019, 04:34 PM

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Recurring Deposit: All You Need to Know



The Recurring deposit is an investment at the bank or Post office, where a depositor invests a fixed pre-determined amount each month, for a fixed time period. The RD can be availed by all people as the minimum deposit required is just Rs 10 at the post office. A Recurring Deposit helps build a huge corpus at maturity. Interest rate in this kind of deposit scheme is calculated on quarterly compounding basis.

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Recurring Deposit: All You Need to Know

Features of RD:

Given below are the main characteristics of recurring deposits:

  • Recurring deposits develop the regular habit of saving money, which means not just good returns, but also continuous savings.
  • The recurring deposit can be made for a minimum of 6 months to a maximum of 10 years.
  • Recurring deposits have high rate of interest and offer good returns.
  • The minimum deposit for recurring deposit is Rs 10.
  • The bank provides loan facility on recurring deposit which is 80-90% of the amount in the RD account.
  • Recurring deposits can be withdrawn before maturity period.

SEE ALSORecurring Deposit

Types of RD:

There are two types of recurring deposit accounts. They are bank recurring deposits and post office recurring deposits:

  • Bank Recurring Deposits: Investors can decide on how much to invest each month and also choose the tenure that generally ranges from 6 months to 10 years for bank recurring deposits. A recurring deposit serves the dual purpose of regular savings and investments, allowing the investor enjoy higher returns in the future.
  • Post Office Recurring Deposits: A post office recurring deposit also works the same way as bank recurring deposit. The investor can deposit money at regular intervals and earn interest over a fixed period of time. The POTD is a scheme offered by the Indian postal service, where the interest paid on the deposit is compounded quarterly. The only difference is that the post office recurring deposit can be made for a fixed period of 5 years.

Eligibility Criteria For Investing In Recurring Deposit:

You can open a recurring deposit account at any bank or post office, if you are a citizen of India. Listed below are few other eligibility criteria for recurring deposit account:

  • A minor above the age of 10 years can open a recurring deposit account.
  • A minor below 10 years can open a recurring deposit account under the care of parents.
  • Recurring deposit accounts can also be opened by any corporate, government organisation, company or commercial organisation.
  • HUF and NRIs can also open RD accounts. NRI can open RD accounts through NRE and NRO RD accounts.

 Interest Rates On Recurring Deposit:

Post office recurring deposit offers a higher rate of interest than bank recurring deposits. From January 2019 to March 2019, the interest rate on Post Office Recurring Deposit is 7.3% a year, which is compounded quarterly.

The rate of interest offered on Recurring Deposit varies across banks with interest ranging from 5.75% to 8.05%. The amount of interest you can earn also depends on the amount deposited in the RD account, the tenure of the RD and the interest rate offered by your bank for that tenure. RDs can be availed by senior citizens which helps them fulfill financial goals.

The interest rates for senior citizen deposits are higher than the regular account. For this, the minimum amount and tenure are fixed by the bank. The interest on RD is compounded on a quarterly basis. Most banks offer senior citizens an additional interest rate of 0.25% to 0.75%, as compared to regular recurring deposits.

SEE ALSO: Types of Recurring Deposit

Recurring Deposit Taxation:

The interest earned on the RD is taxable as per tax brackets. With effect from 1st June, 2015, these deposits are subject to TDS (tax deducted at source) as per the income tax laws. There will be no TDS deduction if the interest income earned does not exceed Rs 40,000 in a financial year. This is Rs 50,000 for senior citizens.

Tax on recurring deposit must be paid as per applicable income tax slabs at the time of filing income tax return. If you have submitted Form 15G (in case of citizens under 60 years) and 15H (in case of senior citizens) at the bank, your TDS will not be deducted (in case your total taxable income doesn’t exceed minimum tax exemption limits).

Recurring Deposit: Renewals and Withdrawals

In case of post office recurring deposit and bank recurring deposit, the account holder /depositor must renew the account for the same tenure on maturity. Premature withdrawal on deposits is allowed, however the depositor must follow terms and conditions on premature withdrawal laid by the post office or bank. On premature closure of bank RD for reinvestment, interest is paid to the account holder without reduction on interest rate. However the account holder would incur a 1% penalty.

Premature Withdrawal on RD: Premature withdrawal on RD is not allowed before maturity. If you want to withdraw the funds in case of an emergency, then you can close your RD account before maturity and withdraw the funds. However, you must pay a minimum penalty of 1-2% for premature withdrawal that will be deducted from the interest.

There is a minimum lock in period of 3 months on recurring deposits. If a withdrawal is made before the minimum lock in period, then the investor earns no interest on the deposits and only the principal amount is refunded. In case of post office recurring deposits, premature withdrawal is allowed only when a minimum of 12 monthly deposits are made. So, the RD account must be active for a minimum of a year to avail this facility.

Partial Withdrawal on RD: Partial withdrawal is not allowed in case of recurring deposits. Some banks allow the account holder to avail loans or overdraft facility by pledging the recurring deposit as collateral. In case of post office recurring deposit, partial withdrawal is allowed, where the account holder withdraws 50% of the total amount. The amount withdrawn must be in multiples of 5 and must be paid back in lump sum before maturity.

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