Recurring Deposit

What is a Recurring Deposit Account?

A Recurring Deposit (RD) account is a savings option where you can deposit a fixed amount regularly and earn interest on your investment. It is a term-deposit product offered by banks, designed to encourage disciplined savings while providing assured returns.

With an RD account, you can track your savings, calculate returns using an RD calculator, and enjoy features like flexible tenure and guaranteed returns. The main difference between a recurring deposit and an RD account is that a recurring deposit refers to the act of regularly depositing money, while an RD account is the official bank account where these deposits are made, and interest is accrued.

How Does a Recurring Deposit Account Work?

An RD account works by allowing you to deposit a fixed amount of money into the account on a monthly basis for a predetermined period.

To open an RD account, you need to follow the steps given below:

• The first step to opening an RD account is to visit a bank or financial institution, fill out the required forms, and submit identification and address proof.
• Decide the monthly deposit amount and tenure based on your financial goals. Banks set their own minimum deposit amount and tenure requirements.
• The chosen deposit amount is automatically deducted each month from your linked savings or current account.
• Your deposits earn interest at a fixed rate determined by the bank, usually calculated and compounded quarterly.
• At the end of the tenure, the RD matures, and you receive the total deposited amount along with the interest earned.
• Maturity payouts can be received as a lump sum or reinvested into another RD account.
• While RDs are fixed-term investments, you can withdraw funds prematurely, but this often comes with conditions and penalties.

Features of a Recurring Deposit Account

Different features make recurring deposits an attractive investment option for individuals looking for a disciplined savings tool with guaranteed returns. Some of these features include:

Assured Returns

For individuals seeking stable returns, recurring deposits work as a dependable choice, much like a money back policy , but with the added advantage of flexibility in deposit amounts and tenure. This is a great feature as, unlike risky investments, you know exactly how much you will earn at the end of your tenure.

Higher Interest Rate

RDs typically offer higher interest rates compared to regular savings accounts, allowing investors to earn competitive returns on their savings. Some banks even offer special rates for senior citizens, making it an attractive option for short term investment plans and long term investment plans alike.

Flexible Investment Amount

You, as an investor, have the flexibility to choose the amount you want to deposit monthly, making RDs accessible to individuals with varying income levels and financial goals.

Flexible Tenure

Whether you are saving for a vacation or a 5 years investment plan , RDs offer a wide range of tenure options, from 6 months to 10 years. You choose the tenure that suits your financial goals and investment horizon.

Overdraft Facility

Many banks offer overdraft facilities against your RD account, allowing you to borrow money against your RD deposits at favorable interest rates in case of emergencies.

Lock-in Period

While RDs have a fixed tenure, they usually do not have a lock-in period, meaning you can withdraw your funds prematurely if needed, albeit with certain penalties and conditions.

Benefits of Having an RD Account

Having an RD account comes with several advantages, such as having fixed interest rates and offering the choice of amount and how long you want to invest. Let us take a quick look at some recurring deposit benefits:

Simplified Investment Product

RDs provide a straightforward way to save and invest regularly, making them suitable for you if you prefer a systematic approach to saving.

Guarantee of Returns

Unlike market-linked options like a new fund offering , RDs offer guaranteed returns. This means that your money grows steadily without any risk.

Choice of Investment Term and Amount

Whether it is a one time investment plan or a recurring one, RDs give you the freedom to decide your investment amount and term. This customization makes it perfect for all kinds of savers.

Ease of Withdrawal

While recurring deposits are designed for fixed-term investments, they offer some flexibility in terms of premature withdrawal, albeit with penalties. This feature provides a degree of liquidity compared to some other investment plans .

Loan Against Recurring Deposits

Many banks allow customers to avail loans against their RDs, providing access to funds in times of need without having to break the RD prematurely. This feature can be useful in managing short term financial requirements without disrupting long term savings goals.

Who can Invest in an RD Account?

Anyone with a source of income and valid identity proof can invest in a Recurring Deposit (RD) account. This includes:

• Individuals: Both salaried and self-employed individuals can invest in RD accounts.
• Minors: Minors can open RD accounts jointly with their guardians or parents. The guardian will manage the account until the minor reaches the age of majority.
• Senior Citizens: Senior citizens can invest in RD accounts to generate regular income during retirement.
• Hindu Undivided Families (HUFs): HUFs can also invest in RD accounts, provided they furnish the required documents.
• Trusts and Organizations: Some banks or financial institutions may allow trusts, clubs, societies, and other organizations to open RD accounts.

Also, note that checking with the specific bank or financial institution regarding their eligibility criteria and documentation requirements before opening an RD account is essential.

What Should You Know About RD Interest Rates?

RD is a risk-free investment option that allows you to earn interest on the money you save regularly. These interest rates vary from bank to bank and depend on factors like the amount invested, the tenure, and the specific RD scheme chosen. Generally, longer tenures come with higher interest rates. Senior citizens usually enjoy additional benefits, so if you plan for a 1 crore investment plan , it is worth checking the rates before committing.

Banks use a standard formula to calculate maturity value:

M = R [(1+i) n – 1]/ 1 – (1+i) -⅓

• M: Maturity value
• R: Monthly installment
• n: Number of quarters
• i: Interest rate / 400
• Guaranteed Returns:

RD interest rates remain constant throughout the tenure, ensuring safe and guaranteed returns. Before investing, check and compare interest rates offered by different banks to find the best option with maximum returns. Also, opt for banks offering the highest RD interest rates for better maturity value and greater benefits.

What Factors Should You Consider Before Opening an RD Account?

Before opening an RD account, there are several factors you should consider. By evaluating these factors, you can make an informed decision when opening an RD account:

Rate of Interest

Compare the interest rates offered by different banks or financial institutions. Even a slight difference in interest rates can significantly impact your returns over the tenure of the RD. You should opt for the highest interest rate available to maximize your earnings.

Amount of Investment

Determine the amount you can comfortably deposit each month into the RD. While there might be a minimum deposit requirement, consider your financial situation and ensure the monthly installment fits your budget without causing strain on your finances.

Investment Tenure

Assess your financial goals and choose an RD tenure that aligns with them. Shorter tenures might offer lower interest rates but provide quicker access to funds, while longer tenures often yield higher interest rates but tie up your funds for a longer period. Consider factors such as upcoming expenses, future financial goals, and liquidity needs before deciding on the tenure.

Tax on Interest Income

Understand the tax implications of the interest earned on RDs. Interest income from RDs is taxable as per the individual’s income tax slab. Consider the impact of taxation on your overall returns and factor it into your investment decision. Additionally, explore tax-saving RD options if available, such as those offered by some banks under the Income Tax Act, which offer tax benefits under Section 80C.

How to Open an RD Account Online?

You have to follow these steps to open a Recurring Deposit (RD) account online:

• Log In to Your Banking App or Use Net Banking: Use your existing credentials to access your bank’s online banking platform (mobile app or website).
• Find the RD Account Option: Look for a section on “Deposits,” “Open an Account,” or similar options. You might find a specific tab for “Recurring Deposits.”
• Choose Your RD Details: Specify the amount you want to deposit each month (installment amount), the tenure (duration) of your RD, and the type of account (single or joint).
• Select Fund Source: Choose the bank account from which your monthly installments will be deducted automatically.
• Review and Submit: Carefully review all the details like interest rate, maturity amount, and nominee information (optional: the person who receives the RD proceeds if you pass away). Once confirmed, submit the online application.

How to Open an RD Account Offline?

Here are the steps to follow if you want to open an RD account offline:

• Visit Your Bank Branch: Go to your nearest bank branch where you have a savings account (or are comfortable opening one).
• Meet a Bank Representative: Inform them of your intention to open a recurring deposit account.
• Fill Out the RD Application Form: The bank representative will provide you with an RD application form. Fill in the details like your name, address, desired deposit amount, tenure, nominee (optional), etc.
• Submit the Application and Initial Deposit: Attach any required documents (like ID proof and address proof) and make your first installment deposit along with the completed application form.
• Account Opening Confirmation: The bank representative will process your application and inform you once your RD account is active. You will receive an account number and details for future reference.

What are the Documents Required to Open an RD Account?

To open an RD account, you typically need the following documents:

• A filled RD application form
• Recent passport-size photographs
• Identity proof (like an Aadhaar card, PAN card, or passport)
• Address proof (like utility bills or driving license)
• KYC documents, if requested by the bank
• Additional documents for minors and joint account holders

Also, make sure to always check with your bank for any additional requirements

Who can Invest in a Recurring Deposit?

An RD is a flexible and accessible investment option for a wide range of individuals and entities. Anyone with a savings account can open a recurring deposit account, whether through a bank or a post office. Here is a list of who is eligible to invest in an RD:

• Individual savings account holders
• Minors above 10 years old
• Minors under 10 years old, with a natural or legal guardian’s supervision
• Corporates, companies, proprietorships, or commercial organizations
• Government organizations

Conclusion

A recurring deposit is a reliable and straightforward savings tool for anyone looking to grow their wealth steadily. With assured returns, flexible options, and the ease of planning with tools like an RD calculator, it is a perfect choice for both short term investment plans and long term goals.

Whether you are starting your journey of saving or seeking new tools for disciplined investments, RDs provide a reliable option for growth. So, do not wait and invest in an RD now to take a step closer to financial security!

FAQs on Recurring Deposit?