The Reserve Bank of India, has over the years introduced various schemes to educate the public on how to save money. One of the key directives issued by RBI was the introduction of term deposits and the interest applied on such schemes. As per clause 2(iv) of RBI Master Circular dated 16th March 2004, Term Deposits is defined as “a deposit received by the bank for a fixed period and which is withdrawable only after the expiry of the said fixed period and shall also include deposits such as Recurring/Cumulative/ Annuity/Reinvestment deposits, Cash Certificates, and so on.
Recurring Deposits, commonly known as RD, is one of the most unique term deposits offered by Indian Banks and is one of the most popular and preferred investment schemes opted by individuals. A recurring deposit account provides customers with the flexibility to invest an amount of their choosing monthly for a fixed period with an intention to receive an attractive accumulated lumpsum amount along with the remaining or accumulated interest at the end of the fixed period.
Such facilities are offered by most of the financial institutions to the individuals today.
Features of Recurring Deposit
1) Simple Investment
A Recurring Deposit is the simplest and the most convenient investment option available in the Indian financial market. The concept of investing money in it is extremely simple. The idea is that an individual invests a certain amount every single month for a fixed tenure. Upon the maturity or completion of such a tenure, the individual receives the principal amount which he has invested along with the remaining or accumulative interest thereby acting as a successful investment.
The procedure to open a RD Account is simple and not at all complicated. In an event the individual wishes to open up a recurring deposit account with their bank in which he already has an account. If you want to open an RD Account in the same bank that you already have a Savings Account with, you would need minimal documentation. However, if you need to open a RD Account in a bank different from that of a Savings Bank account, presentation of basic KYC documents along with your residential proof is enough.
2) Low Minimum Amount
The minimum amount required by an individual to open up a recurring deposit account varies from bank to bank. Few Banks allow individuals to open up a recurring deposit account for a deposit of Rs. 10 too.
3) Guaranteed Returns
Unlike Equity and mutual funds, Recurring Deposits is not subjected to market risks. A fixed rate of interest is charged on the recurring deposits thereby offering guaranteed returns on the principal amount invested by the individual in a short term.
The term periods for investing in a recurring deposit are divided into three categories :-
- Short Term – 6 months to 1 year.
- Medium Term – More than a year to 5 years.
- Long Term Tenure – 5 years to 10 years.
5) Premature Withdrawal
Few banks permit the allowance of pre- mature withdrawal of recurring deposit unlike other deposits. The banks calculate the interest payable to the individual on the basis of the tenure which is remaining.
6) Loan against deposit
An individual has an option to avail a loan to the tune of 90 – 95% of the total amount deposited in the recurring deposit account depending on the bank.
7) Flexible Recurring Deposits
Several banks today provide the facility of flexible recurring deposits wherein there is no requirement to deposit a fixed amount of money every single month in a recurring deposit account for few banks. In a flexible recurring deposit facility, a person is allowed to invest any sum of money at any interval of the tenure upon the basis of his / her convenience. Banks are also flexible enough to skip an installment without the need to pay any penalty. For example, if a depositor chooses Rs. 100 as the core amount or he can choose to make a deposit of Rs. 100 or its multiples in the next deposit. There is no compulsion to deposit the same amount every single month.
8) Higher Rate of Interest
Banks offer a rate of interest which is almost equivalent to that of a Fixed Deposit which is comparatively higher than that of other savings schemes which gives guaranteed returns. For example, the rate of Interest offered by the State Bank of India on a savings deposit account is 2.75 % and the interest offered on a recurring deposits account is 5 % for a tenure of 1 to 2 years.
Procedure for Opening a Recurring Deposit Account.
Any individual can open a recurring deposit account either online by visiting the website of the bank or by visiting the office of the bank. Such an individual needs to submit the following documents:-
- Duly Filled Form.
- KYC Documents such as PAN Card, Aadhar, Etc.
- Residential Proof.
Factors to Check Before Applying for a Recurring Deposit Account.
Despite a Recurring Deposit providing guaranteed return of the Principal Amount, an individual should consider the following factors before choosing a bank for opening up a recurring deposit account:-
- Rate of Interest offered by the Bank on the Recurring Deposit Account.
- Term period offered by Bank on the Recurring Deposit Account.
- Facility of Premature Withdrawal in the Recurring Deposit Account.
Procedure for Cancellation of a Recurring Deposit Account.
An individual can close a Recurring Deposit Account by either submitting a request for closure at his nearest bank branch or log into his banks net banking or mobile application facility and follow the steps provided thereunder to close the account.
Tax Benefits on a Recurring Deposit Account.
Since April 2019, Tax deducted at source is applicable on Recurring Deposits and is deducted at a rate of 10% on the interest which was earned over and above Rs. 40000 for basic individuals and Rs. 50,000 for senior citizens. It is pertinent to point out that no interest is deducted for the interest earned up to Rs. 40,000 or Rs. 50,000 for senior citizens.
No tax exemptions are attracted on recurring deposits. However, individual below the age limit of 60 years having no taxable income can evade TDS on recurring deposits by submitting Form 15G.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. City Credit Management LLP is not liable for any decision arising out of the use of this information.