A Recurring Deposit (commonly known as RD) is a unique term deposit offered by banks, post offices and non-banking financial companies (NBFCs), which consists of two components- regular deposits and interest. It is an investment tool under which account holders can choose to invest a particular amount each month, ensuring that they have sufficient income for an emergency. It provides flexibility and ease of use to individuals also giving them an opportunity to earn decent returns on their investment. Given the fact that FDs are rigid and are not ideal for short terms, a Recurring Deposit is an ideal investment cum savings option.
There are two types of RDs – regular and flexible. In a regular RD, which is found in all banks and post offices, you can deposit a fixed amount at predetermined intervals. You can’t change the deposit amount once you have agreed to it. For example, if you enroll in a regular RD with a bank to invest ₹5,000 monthly, you have to invest that amount at a fixed date every month until the end of the year. A flexible RD, on the other hand, gives you the option of depositing any amount, on any day, at any frequency.
How RDs work?
Simply put Recurring Deposits work by allocating a fixed amount of money that you choose, every month from your bank account and transfer it to the Recurring Deposit account or RD A/c for the period you have specified. On this amount the bank pays you interest which is equivalent to the interest you earn on a Fixed Deposit.
To simplify it further, let’s say you can save ₹5,000 every month and want this money to be invested in RD for a year. All you need to do is apply to your bank to open an RD of ₹5,000 per month for a year. The bank will start the RD from the day you send this request and subsequently every month on that date, that is if you made a request for Recurring Deposit on the 7th of Nov, your next RD installment will be deducted on 7th Dec, 7th Jan and so on till the end of tenure. On this, you will earn an interest that is equal to the bank’s FD interest rates, so if the FD gives 10% p.a. same will apply to your RD and at the end of your tenure, the total amount plus accumulated interest will be deposited to your bank account.
The main features of Recurring Deposit account are as follows:-
- Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.
- The minimum amount that can be deposited varies from bank to bank. It can be an amount as small as ₹10.
- The minimum period of deposit starts at six months and the maximum period of deposit is ten years.
- The rate of interest is equal to that offered for a Fixed Deposit and is hence higher than any other Savings scheme.
- Premature and mid-term withdrawals are not allowed. However, the bank may allow closing the account before the maturity period, sometimes with a penalty for premature withdrawal.
- RD offers the additional benefit of taking a loan against the deposit, i.e., by using the deposit as a collateral. About 80 to 90% of the deposit value can be given as loan to the account holder.
- The Recurring Deposit can be funded periodically through Standing Instructions which are the instructions given by the customer to the bank to credit the Recurring Deposit account every month from his/her Savings or Current account.
Duration of Recurring Deposit
You can open a Recurring Deposit account with a bank, where the compounding of interest will be done on a quarterly basis. The deposit term starts with a minimum period of 6 months, and after that, they can choose to increase the tenure in multiples of 3 months up to a maximum period of 10 years. The minimum period for an RD varies from bank to bank. Some banks specify 24 months of minimum duration.
Eligibility for Recurring Deposit
Most Indian banks offer resident Indians and HUF (Hindu Undivided Families), the opportunity to open an RD with them. Some banks even have RD schemes for children and in this scenario minors are also eligible to apply with guardians to supervise their finances.
Following documents are required to open an RD account:
- 2 recent passport photographs
- Duly filled and signed application form
- KYC documents
- Other documents as requested by the bank
RDs offer following advantages:-
- Simple to understand: As explained above, RD is simple to open and you don’t need to monitor it as the bank does the rest for you till your deposit matures.
- Fixed monthly investment: A recurring deposit fixed monthly investment builds up a savings discipline which is otherwise very tough to have in today’s society which is so spend oriented. Also for salaried people who have a predictable earnings month-on-month, it’s easier to save a little amount every month rather than putting in a lump sum as expected in a Fixed Deposit.
- Fixed duration: The investment in a recurring deposit comes within a fixed duration. This allows the customer to plan for certain predictable events in their lives e.g. buying a car or money for a wedding etc.
- Fixed rate of interest: The rate of interest is locked-in in a Recurring Deposit, which as compared to certain other investment instruments insulates the customer from swings in the interest rates.
- Useful for planning your short-term goals: Lot of your short-term goals like a Yearly Vacation, Kid’s School Fees, Insurance premiums, planning to upgrade your PC or phone etc. can be easily met by a Recurring Deposit account. At times, you may not have the total amount of money ready for you to meet these expenses. To avoid this, open an RD and divide the expenses throughout the year. So if you need to pay ₹25,000 as school fees, ₹20,000 as insurance premiums, ₹30,000 for your new smartphone and ₹45,000 for that vacation, then you can go for 4 Recurring Deposits that end a few days before these goals are due.
You can opt for an RD or ₹2100 a month for school fees, ₹1700 for premiums, ₹2500 for that phone and ₹3700 for that vacation. So you invest about ₹10,000 a month regularly and this ensures that when the time comes, all your goals are met and you need not compromise on any of it. The interest earned is a bonus too.
- Saving for other investments: With the accumulated corpus of your RD account, you can start with other investments like SIP for a long-term, get a term plan and invest any surplus in some other product or take a Fixed Deposit from that amount. For instance, if you opened an RD for ₹3000 a month for a year, at the end of the year ₹36000 + applicable interest will be deposited to your account. From this start a SIP in a good Mutual Fund for ₹2,000 a month, and buy health and life insurance from the remaining ₹12,000 but also renew the ₹3000 RD as all this SIP and health and life insurance premium is going from the money you put in last year. You are still practically investing only ₹3,000 a month this year and continuing the other investments out of that.
- Saving for Long-Term Goals like Home loan EMI: If you have a plan of buying a house in the next year or are already thinking of gearing up for home search, then it is wise to get a rough estimate of the EMI you will be paying when you take a home loan. Let’s say you avail a loan of ₹15 lacs and will have an EMI of ₹14,500. It is advisable to start an RD of this amount from planning stage itself. What this will do is that it will already build a corpus from which your initial EMIs can go and you will be less burdened later. You will always be a year ahead of your EMIs and the money saved this way can always be used for pre-paying the home loan.
- Better than SIP for Short Term investment: It is better than a SIP in Mutual Fund, if your investment purpose is short term, for a period less than 4-5 years or even lesser. Equity gives the best returns, but only in the long run, that is at least a period of 7 and at times 10 years. So, if your investment horizon is a lot lesser and you need decent returns by investing systematically, then look forward to RD.
A financial product comes with benefits, but will always have some flaws. Let us take a look at certain things that may be slightly discouraging when you are taking a recurring deposit as your saving instrument:
- Liquidity: When you deposit the money in an RD, you will never have the privilege to withdraw any part of the money until the term of the deposit is over. Hence, if you are looking for an easy liquidity instrument, recurring deposits are an absolutely bad idea. On the other hand, if you want to discipline your savings this disadvantage may work to your benefit.
- Rate of Interest: The interest rate that you earn on recurring deposit is much lower than regularly fixed deposit schemes since your deposits are being made in small installments and not as a whole chunk.
- Stringent Monthly Installments: It is not possible in the case of recurring deposits to be able to change your deposit amount, regardless of your financial situation at the moment. With a fixed amount of investment each month, someone with chances of extra or fewer funds for the deposit should be discouraged from opting for this product.
Some Useful Tips
- Find out the penalty charges for late payment. If there are charges levied, it is best not to miss a payment. This could reduce the interest you earn.
- Taking a loan against your deposit should be done only if absolutely necessary. The interest you pay on the loan might be much more than what you earn. It might be more feasible to break the deposit. Research and find out which option would be better.
- Opening RDs online is easy and convenient. The money will automatically be deducted from your savings or current account.
- Setting standing instructions will ensure that you never miss a payment. But always ensure that your bank account is funded sufficiently.
- View the interest chart before you open a recurring deposit. Banks offer different rates for different tenures. You can choose a tenure that gives you the best interest rate.
- If your total income earned is less than the income tax bracket, you can fill in Form 15G to claim tax benefits on RDs. There will be no TDS on the deposit. Senior citizens can fill up Form 15 H.