What is Recurring Deposit?
Recurring Deposit is one of the very important and unique term deposit. Recurring Deposits are offered by all public sector banks, private sector banks, small finance banks, Co-operative banks and other financial institutions in India. This is considered is a an important mode of investment for two reasons – it encourages a regular savings habit among the investors and provides a decent returns on the invested deposit amount.
Under this deposit, investors can fix up an affordable amount from his monthly savings and has to keep depositing this fixed amount on monthly basis regularly up to the maturity period. Upon the completion of the maturity period, the investor can withdraw the principal amount along with the accumulated interest amount. Failing to deposit the monthly installment may result in charge of a penalty. This amount will be determined upfront while opening the account.
Interest from Recurring deposit is generally compounded on quarterly basis. Interest offered by various banks and financial institutions for recurring deposits ranges from 4.50% to 8.40%. As per the strict guidelines of Reserve Bank of India, the interest rate will not be changed during the tenure. The tenure of a Recurring Deposit ranges from 6 months to 10 years. Investor can choose the tenure depending on his needs and interest factor.
Features of Recurring Deposit
- Recurring Deposits inculcate the habit of saving among the people as investment is made as a fixed amount on monthly basis.
- Deposit can be made in installments.
- Monthly installment starts from as low as Rs.10/-.
- The tenure of a Recurring Deposit ranges from a minimum period of six months to a maximum period of ten years.
- Interest offered by various banks and financial institutions for recurring deposits ranges from 4.50% to 8.40%.
- Recurring Deposit account can be closed before its maturity period in case of any financial emergencies, subject to a penalty amount.
- Partial withdrawals are not allowed.
- Loans can be availed by using the deposit account as a collateral for loan.
- Nominee facility is available.
- Standing instructions can be made to withdraw monthly installments from the investor’s savings bank account automatically on the due date to avoid penalties.
Benefits of RD
- Encourages the savings habit among the people.
- Since deposits are made in equal monthly installments, it reduces the burden of investing in lump sum.
- Monthly installment is affordable even to a common man as it start from Rs.10/-.
- Pre-closure of the Recurring Deposit account is allowed.
- Recurring Deposit can be used as a collateral to avail loan facility.
- Senior Citizens are provided with a higher rate of interest.
Eligibility for RD account
Any resident of India or Hindu Undivided Family (HUF) can open a Recurring Deposit account in most of the banks and financial institutions. Non Residents of India (NRI) can also open the Recurring Deposit account through NRO and NRE accounts. Like Savings Account, some banks and financial institutions allows Recurring Deposit account to be opened for minor children also. In such cases the parents or the guardian of the child will act on behalf of the child for managing the account.
RD Interest computation
Recurring Deposit is usually calculated as a compound interest on a quarterly basis. When the interest amount gets added to the principal amount on quarterly basis, the accumulated interest will also earn interest. Hence interest is calculated as compound interest.
The following formula gives you the total amount the investor will receive at the time of maturity, if compounding is done:
Maturity Value of the Recurring Deposits (based on Quarterly Compounding):
M = Maturity value
R = Monthly installment
n = Number of quarters
i = Rate of interest/400
Say Mr. Praveen opens a Recurring Deposit account for a tenure of 2 years with a monthly investment of Rs.40,000/-, with 8.50% as rate of interest. The interest is computed on quarterly basis.
Monthly installment = Rs. 10,000/- (R)
Number of quarters = 8 (n) [24 months / 3]
i = 0.02125 (8.50/400)
Applying the parameters in the above formula will yield a maturity amount of Rs. 2,62,284.47. Principal Amount comes to Rs. 2,40,000/- at the end of 2 years. So the interest earned will be Rs.22,284.47
Duration of Recurring Deposits
The depositor can open a Recurring Deposit whose tenure ranges from a minimum period of six months, and therein increased in multiples of three months, to a maximum period of ten years. The depositor can choose a tenure up to which he can keep investing. Usually the minimum tenure keeps varying between different banks and financial institutions. Tenure is also one of the important factor that determines the rate of interest for the Recurring Deposit.
Maturity of RD account
On the date of maturity of a Recurring Deposit account, the depositor can request the bank to transfer the maturity amount to his savings account and he can withdraw the amount from his savings account. The user can also transfer the maturity amount into other deposit types in banks like Fixed Deposits.
Renewal of RD
The same Recurring Deposit account cannot be renewed. Upon the completion of its maturity period, a new Recurring Deposit can be opened for the same or different installment amount and tenure.
Withdrawals of RD
Partial withdrawal is not allowed in Recurring Deposits. Though partial withdrawal is not allowed, premature withdrawal is allowed with some penalty, where the entire amount can be withdrawn in lump sum. Partial withdrawals are also allowed by some banks in form a loans to the investors.
Premature withdrawal is permitted in Recurring Deposits but under two conditions:
- A penalty of 1-2% will be charged for the premature withdrawal or the interest paid will be lower than the base rate for the deposit tenure with the bank.
- The rate of interest shall be applicable only to the period for which the deposit has remained with the bank
Generally the minimum lock-in period for a Recurring Deposit account is 1-3 months and if a premature withdrawal is made before this lock-in period, the investor will not be entitled to get any interest and only the principal amount that was deposited would be refunded. But the penalty on interest and other incentives on the Recurring Deposit will be waived off.
Nomination in RD account
Recurring Deposits are also provided with nomination facility like other bank accounts. The Recurring Deposit account, whether it is single or joint holder account, can have one person as a nominee. This nominee can be changed by the account holder(s) at any point of time in the deposit tenure through a declaration in an appropriate form.
RD for Senior Citizen
Senior citizens can also avail the Recurring Deposit facility but with a little added benefit in terms of rate of interest offered. The rate of interest for senior citizens are higher than the normal deposits. They are entitled to receive 0.25 percent to 0.75 percent more interest rates than normal Recurring Deposits. To quality as a senior citizen, your age must be above 60 years on the date of opening the Recurring Deposit account.
Recurring deposits for NRIs
Non Residents of India (NRI) can also invest in Recurring Deposits. They have two options do so:
Non Resident External (NRE) Recurring Deposits Accounts: In this option, the monthly installments can be made through (credited from) the Non-Resident External (NRE) account. The income received from such accounts is not taxable in India. Likewise, the maturity amount is freely repatriable, i.e., can be taken back to the investor’s home country without any complications.
Non Resident Ordinary (NRO) Recurring Deposits Accounts: In this option, the monthly installments can be made through (credited from) either the Non-Resident External (NRE) account or Non-Resident Ordinary (NRO) account. The income received from such accounts is taxable in India at the rate of 30% plus the additional CESS. In this also, the maturity amount is repatriable, i.e., can be taken back to the investor’s home country but with certain requisites.
Income Tax on Recurring Deposits
Though tax was not deducted on Recurring Deposits before, it has come into effect around 2 years back from June 1, 2015. Now as per the I-T laws, Tax Deducted at Source (TDS) is applicable for the interest income on Recurring Deposits. If the interest earned from the Recurring Deposit for a financial year does not exceed Rs.10,000/-, TDS will not be deducted. In other cases, TDS will deducted by the bank at a rate of 10% on the interest income of Recurring Deposit.
In case the income of the depositor does not fall under the taxable slab, he has to submit Form 15G (if he is a normal citizen) or Form 15H (if he is a senior citizen), so that bank will not deduct the TDS on the interest income of his Recurring Deposit.
Loan against recurring deposit
A Recurring Deposit account is also entitled to avail a loan or an overdraft facility. Usually a loan amount of upto 75% – 95% of the deposited amount in the Recurring Deposit account is offered to the investor. This percentage depends from bank to bank and each bank has their own terms and conditions on offering the loan. Though partial withdrawal option is not available in Recurring Deposits, this loan option will benefit the investor to get amount for emergency needs at a lower interest rates. The good part is that the interest income keeps accumulating even though the loan is availed.