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Recurring Deposits (RD): Popular Investment Option in India

Team AckoNov 29, 2024

A recurring deposit is an investment offered by banks and other financial institutions in India, as it helps people save money safely and be disciplined over a given period. It allows the deposit of a fixed amount in a bank periodically for a specific period with accrued interest. An individual should know what RD is, how RD works, and the advantages of recurring deposits before investing in an RD scheme.

Though an RD provides assured returns and is a low-risk investment, it has some drawbacks, such as the following: the interest rates applied by an RD are relatively low compared to other investment instruments, such as FDs. To make the right choice, it would be worthwhile to read about recurring deposit account features, types of recurring deposit accounts, and RDs' main advantages and disadvantages.

recurring-deposits

Contents

Features of Recurring Deposit Account
Advantages of Recurring Deposits
Disadvantages of Recurring Deposits
How to Open a Recurring Deposit Online
Who Should Open a Recurring Deposit?
Types of Recurring Deposits
Eligibility Criteria for Recurring Deposit
Important Factors to Check Before Applying for Recurring Deposit
Difference Between Systematic Investment Plan and Recurring Deposits
Conclusion
Frequently Asked Questions (FAQs)

A Recurring Deposit (RD) is an investment scheme where individuals deposit a fixed amount of money at regular intervals over a specific period. The deposit amount, tenure, and interest rate are determined when opening the RD account. Recurring Deposits are regarded as a safe and low-risk investment option, primarily due to being backed by the reliability of banks and financial institutions. This recurring deposit account allows investors to accumulate a substantial amount over time with assured returns, making it an attractive choice for those seeking steady savings.

Features of Recurring Deposit Account

Here are some key features of an RD account:

Regular Deposits: Individuals can make regular monthly deposits of a fixed amount with an RD deposit account. These deposits can be automated, ensuring a disciplined approach to savings.
Fixed Tenure: RDs have a predetermined tenure ranging from a few months to several years. The depositor chooses the tenure at the time of opening the account.
Fixed Interest Rate: The interest rate on RDs is fixed at the time of account opening and remains constant throughout the tenure. This provides predictability and stability in the returns earned on the investment.
Interest Calculation: The interest on RDs is usually calculated using the quarterly compounding method. This means that the interest is added to the principal amount at the end of each quarter, leading to cumulative growth over time.
Partial Withdrawals: Some banks allow partial withdrawals from RD accounts in case of emergencies or financial needs. However, restrictions, penalties, or reduced interest rates may be associated with premature withdrawals.
Nomination Facility: RD accounts allow nominating a beneficiary who will receive the deposit and interest in case of the account holder's demise. This ensures a smooth transfer of funds and avoids legal complications.
Loan Facility: RDs can be used as collateral to avail loans from the bank. The loan amount can be a percentage of the RD value, providing liquidity and flexibility to investors.
Auto Renewal: At the end of the RD tenure, banks may offer an auto-renewal option where the RD account is automatically renewed for another term unless the account holder instructs otherwise.
Taxation: The interest earned on RDs is taxable as per the depositor's income tax slab. TDS (Tax Deducted at Source) may be applicable if the interest exceeds a certain threshold.

Advantages of Recurring Deposits

Recurring deposits in India offer investors several advantages. Here’s a list:

Systematic Savings: RDs promote disciplined savings by allowing individuals to deposit a fixed amount regularly. This helps inculcate a habit of saving and ensures a consistent flow of funds towards the investment.
Flexibility: RDs offer flexibility in terms of deposit amount and tenure.
Guaranteed Returns: RDs provide guaranteed returns as the interest rate is fixed at the time of account opening. This offers stability and predictability to investors.
Low Minimum Deposit: Most banks in India offer RDs with a low minimum deposit requirement for better accessibility.
Loan Facility: RDs can also be used as collateral to avail loans from the bank. This feature provides liquidity to investors in times of financial emergencies.

Disadvantages of Recurring Deposits

While Recurring Deposits have advantages, there are also some disadvantages.

Lower InterestRates: RDs are known to feature lower interest rates compared to other investment options such as mutual funds or stocks.
Locked: The money deposited in an RD is locked for the predetermined tenure. Premature withdrawal may attract penalties or reduced interest rates.
Inflation Risk: RDs are subject to inflation risk. If the interest rate offered on RDs is lower than the inflation rate, the real value of the investment may erode over time.
Tax Implications: The interest is taxable according to the depositor’s income tax slab, which can reduce the overall returns on investment.

How to Open a Recurring Deposit Online

Opening a Recurring Deposit online is a simple and convenient process. Here's a step-by-step guide to help you get started.

Research various banks and financial institutions offering RD schemes. Compare the interest rates, minimum deposit requirements, and terms and conditions.
Select the bank or financial institution that best suits your requirements.
Visit the bank’s website/app.
Look for the section related to RDs on the website.
Click on the option to open an RD account online.
Fill in the necessary details, including personal information, deposit amount, tenure, and nominee details.
Share documents, such as identity proof, address proof, and PAN card details.
Review the details entered and confirm the application.
Transfer the initial deposit amount from your linked bank account to the RD account.
Once the deposit is successful, you will receive a confirmation email or SMS with the RD account details.

Who Should Open a Recurring Deposit?

Recurring Deposits in India are suitable for various individuals, including the following.

Salaried employees: Individuals with a regular income can benefit from RDs as they help in systematic savings.
Students: Students who receive pocket money or have a part-time job can start building their savings through RDs.
Retirees: Retirees looking for safe investment options with regular returns can consider opening RDs.
First-time investors: RDs are an ideal choice for first-time investors as they offer a low-risk investment option.

Types of Recurring Deposits

In India, several types of recurring deposit accounts cater to different needs and preferences. Let's explore some of the popular options:

Regular Recurring Deposits: These are the most common RD schemes banks offer where investors commit to depositing a fixed amount every month for a specified tenure. The interest rate and deposit amount remain constant throughout the term.
Recurring Deposits for Senior Citizens: Explicitly tailored for senior citizens, these RD accounts offer higher interest rates and additional benefits, making them a more attractive option for those seeking to secure retirement savings.
Flexi Recurring Deposits: Some Flexi RDs allow investors to deposit varying amounts each month, providing the flexibility to save more when funds are available. This type of recurring deposit suits individuals with fluctuating incomes or those who wish to maximize their savings when possible.
NRI Recurring Deposits: NRI RDs are designed for Non-Resident Indians (NRIs), offering competitive interest rates and the convenience of managing the account remotely from abroad. These accounts help NRIs save money securely while earning interest.
Special Recurring Deposits: Some banks offer special recurring deposit schemes that target specific customer segments, such as children or women, with added benefits or enhanced interest rates. These schemes aim to encourage savings within these particular groups.

Eligibility Criteria for Recurring Deposit

Here are the general eligibility criteria for opening a Recurring Deposit. The exact criteria may vary from one bank to another.

Age: The applicant must be at least 18 years old. Some banks may allow minors to open RD accounts, but with certain conditions and restrictions.
Residential Status: RDs are available for resident and non-resident Indians (NRIs). However, the eligibility criteria and features may differ for NRIs.
KYC (Know Your Customer) Compliance: To comply with regulatory guidelines, individuals must complete the KYC process by submitting relevant documents.
Bank Account: Applicants must have an active savings or current bank account with the bank where they wish to open the RD account. The RD instalment amount will be automatically debited from this account.
Minimum Deposit Amount: RDs have a minimum deposit requirement that varies across banks. The applicant must be able to meet the specified minimum deposit amount.

Important Factors to Check Before Applying for Recurring Deposit

Before opening a recurring deposit account, it's essential to consider several key factors to ensure it aligns with your financial goals. Here are the critical aspects to check:

Interest Rate: The interest rate is one of the most important factors when selecting an RD account. Compare the RD rates offered by different banks and financial institutions to secure attractive returns on your investment. A higher interest rate will significantly impact the growth of your savings throughout the RD tenure.
Tenure Options: Recurring deposits offer flexible tenure options ranging from 6 months to 10 years. Choose the tenure that aligns with your financial goals and liquidity needs. Generally, longer tenures come with higher interest rates, but they also lock in your funds for longer.
Minimum Deposit Requirement: Ensure you can comfortably meet the minimum deposit required to open an RD account. Different types of recurring deposit accounts may have varying minimum deposit amounts based on the tenure and the bank's policies.
Penalties for Missed Instalments: Life can be unpredictable, so it's crucial to understand the penalties for missed payments. Check the bank's policy regarding missed instalments, as missed deposits can affect your RD account and its returns. Ensure you know of any fees or consequences for missing an instalment.
Premature Withdrawal Rules: Familiarize yourself with the rules and charges for premature withdrawal of RD funds. You may want to access your money early in an emergency or financial need. Banks typically impose penalties or reduced interest rates for early withdrawal, so understanding the terms is important.
Loan Facility: Some banks offer a loan facility against recurring deposits. If you anticipate needing a loan, check whether the bank provides this option and understand the terms and conditions. RD loans typically offer lower interest rates compared to personal loans.
Taxation: It's important to factor in the tax implications of your recurring deposit. Interest earned on RD accounts is subject to tax, so ensure you understand how this affects your overall returns. Be aware of the tax on RD and plan accordingly.
Credibility and Reputation: Always consider the credibility and reputation of the bank or financial institution offering the RD account. Opt for well-established banks with a proven track record of safety and reliability. The RD meaning in banking revolves around trust and secure investments, so choosing a reputable institution is crucial for safeguarding your money.

Difference Between Systematic Investment Plan and Recurring Deposits

Here’s a table highlighting the key differences between a Systematic Investment Plan and a Recurring Deposit.

Aspect	Systematic Investment Plan (SIP)	Recurring Deposits (RDs)
Nature of Investment	Investment in mutual funds	Deposit scheme offered by banks
Investment Instrument	Mutual funds	Bank deposits
Returns and Growth Potential	Market-linked, potential for higher returns	Fixed and predetermined returns
Flexibility and Liquidity	Flexible investment amounts and redemption options	Fixed investment amounts, limited flexibility
Risk and Security	Market-related risks	Considered safe with guaranteed returns
Taxation	Tax treatment based on fund type and holding period	Taxable as per the investor's income tax slab

Check out: RD Calculator

Conclusion

For Indians of all ages, recurrent deposits, or RDs, are the most well-liked, secure, and dependable type of investing. Compared to a standard savings account, opening an RD account is now a more profitable way to generate more significant interest rates. Things have gotten easier and more profitable for regular investors due to the increasing number of banks offering recurring deposit plans. With the growing demand for this investment strategy, many things have been easier, such as highly competitive interest rates and less paperwork.

Frequently Asked Questions (FAQs)

Here are some FAQs related to Recurring Deposits in India.

1. What is the difference between a recurring deposit and a fixed deposit?

The difference between recurring deposit and fixed deposit lies in the contribution method. In a fixed deposit (FD), a lump sum is deposited at once, while monthly instalments are made in a recurring deposit (RD). FDs generally offer higher interest rates but are less flexible than RDs.

2. What is the full form of RD in banking?

The full form of RD in bank is Recurring Deposit. RD in bank means a savings scheme where you deposit a fixed monthly sum for a specified period and earn interest. It is a disciplined way to save money with a fixed return.

3. What are the benefits of a recurring deposit account?

The benefits of recurring deposit include guaranteed returns, the ease of saving small amounts monthly, and fixed interest rates. It also promotes disciplined savings, with RD benefits offering predictable growth over time.

4. What is the meaning of RD in banking?

RD, meaning in banking, refers to a Recurring Deposit, a fixed-term deposit where monthly deposits are made. It is a safe investment with fixed returns and is ideal for individuals seeking to save systematically over a period.

5. What is the minimum deposit required to open a Recurring Deposit in India?

The minimum deposit requirement can vary from bank to bank. It can range from as low as Rs. 500 to Rs. 1,000.

6. How does a recurring deposit work?

A recurring deposit means you can make monthly deposits for a fixed period, earning interest compounded quarterly. The accumulated amount, including principal and interest, is returned at maturity. It’s a secure, long-term investment.

7. What is the full form of RD in a bank, and how does it help with savings?

The full form of RD in bank is Recurring Deposit. It helps with savings by requiring fixed monthly contributions, making it ideal for those who want to build savings over time with minimal effort and guaranteed returns.

8. What is an RD in bank?

A Recurring Deposit (RD) is a savings scheme offered by banks where individuals can deposit a fixed amount every month for a predetermined period, earning interest similar to Fixed Deposits.

9. How recurring deposit works?

In a Recurring Deposit (RD), you commit to depositing a fixed amount monthly for a specific period. The bank calculates interest on these deposits at a rate similar to Fixed Deposits, compounding it quarterly or monthly. At maturity, you receive the total deposited amount along with the accumulated interest, providing a secure and systematic way to save.

10. Is RD taxable?

Yes, the maturity amount, including interest, is taxable since the principal amount is not tax-exempt.

11. Can I withdraw money from my Recurring Deposit before the maturity period?

Yes, premature withdrawal is allowed; however, it may attract penalties and reduced interest rates.

12. Are the interest rates on Recurring Deposits fixed or variable?

The interest rates are fixed at the time of account opening and remain the same throughout the tenure.

13. Can I avail a loan against my Recurring Deposit?

Yes, many banks offer loan facilities against Recurring Deposits. The loan amount can be a percentage of the RD value.

14. Can I convert my Recurring Deposit into a fixed deposit?

Some banks allow the conversion of RDs into fixed deposits. However, this is subject to the bank's terms and conditions.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.