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All You Need To Know About Recurring Deposit

Last Update Date : April 30, 2019
Estimated Read Time: 7 min

Recurring deposit is the deposit of specific monthly instalments which is deposited by the people in their recurring deposit account of the bank, by which you earn interest as per the rate applicable for fixed deposits. These term deposits are done by people with regular income, this allows the customer’s regular monthly deposit with the advantage of saving money for the fixed period of time i.e. (not less than 6 months in multiples of 3 months thereafter and not more than 10 years). This Recurring Deposit matures on the specific date in the future along with the instalment deposited every month.

Features of Recurring Deposit

Recurring deposit account of the bank, deposit the instalment as per the rate applicable for fixed deposits. There is the penalty for premature withdrawal or for the mid-term withdrawal as it is also not allowed and also bank may close the recurring deposit account as maturity period is not over. You can also take the benefit by taking a loan against the recurring deposit; by using deposits as the security up to 80 to 90%.

Recurring Deposit can be credited directly from your savings or current account periodically, as per the instructions are given by you to the bank. The recurring deposit scheme gives you an advantage of saving money regularly. Various banks have a different minimum amount for recurring deposit, this can be as less as Rs. 10 as per post office. In the recurring deposit minimum tenure of deposit not less than 6 months and also (and in multiples of 3 months thereafter) not more than 10 years.

Benefits of RD Account

RD smaller investment per month provides an equal interest rate as the regular fixed deposit. As per current income tax rules, TDS is not applicable on the Interest earned by Recurring Deposits. You can also avail the facility to give nominee name while opening RD online. 1-week Grace Days Facility is provided to the investors and no penalty is charged.

Eligibility

Recurring Deposit account holder must be Indian and must also have ID proof & Address proof it can be opened by joint accounts or single and also it can be opened in the name of the minor individual of 10 years of age also operate his/her recurring deposit account.

Recurring Deposit account can also be opened by the below:

  • Commercial Organization
  • Government Organization
  • Corporate
  • Company
  • Proprietorship

How to Apply

It can be applied both online and offline by filling the RD form and also provide the ID, and the address proof verified by the bank, the rate of interest and tenure is mentioned, along with the nominee details. Acknowledgement is taken by the bank as well as customers to avoid future disputes.

Recurring Deposit Taxation

On recurring deposit tax deducted at source (TDS) is applicable, (TDS) can be deducted 10% by the bank if the interest earned on the RD move above Rs. 10,000 a year. The customer those who don’t have their taxable income can submit form 15G to avoid the TDS to be charged on RDs & FDs.

Calculation and Formula

Many of the banks now provide a recurring deposit, so in Indian banks, RD interest is calculated quarterly as per below formula:

M=R[(1+i) n–1]1- (1+i) -1/3

M = Maturity value of the RD
R = Monthly RD instalment to be paid
n = Number of quarters (tenure)
i = Recurring deposit interest rate

Which Bank Provides Best Recurring Deposit ROI

NAME OF THE BANKTENUREREGULAR RECURRING DEPOSITSENIOR CITIZEN RECURRING DEPOSIT
HDFC Bank6 months to 10 years6.25%-7.25%6.50%-7.75%
SBI1 year to 10 years6.70% -6.85%7.20% -7.35%
ICICI Bank6 months to 10 years6.00%-7.25%6.50%-7.75%
Bandhan Bank6 months to 10 years6.40%-7.10%7.15%-7.85%
Canara Bank6 months to 10 years6.35%-7.00%6.85%-7.50%

Note: The interest rates mentioned above are for investments less than Rs 1 crore

Recurring Deposit Applicability

NRI/NRE

No tax is availed from the Non- Resident External RD account in India. In order to invest a small amount of money on a monthly basis by their foreign income on NRI or NRE RD accounts can be availed by non-resident Indians. The interest earned on this account have no taxes for longer tenure so that these RD schemes can be completely repatriated.

Senior Citizens

Special RD interest rates are provided for Senior Citizens. Different bank provide different RD schemes as each bank policy differs so the minimum tenure and the loan amount is decided by the bank as per their own policy but the 0.5% interest rate which is higher than Regular RD account is offered to Senior Citizens.

Points to Remember before Opening an RD account

ROI Consideration

As different banks have different recurring deposit interest rates which vary from 3.5% to 8.5% depending on the amount and duration of deposit to the bank. If you take small RD for 6 months the interest rate would be low which is equal to saving account interest, but if you take RD of 5 years you may get higher & increased interest rate as well. Senior citizen also gets the additional interest rate on RD. so in order to earn a higher return on the investment, you must always compare the rate of interest of recurring deposits with different banks.

Tenure Consideration

Small tenure with a higher rate of interest must be taken before we invest in the recurring deposit. For Example, the banks provide for 1 year 7.6% p.a. interest and for 15 months 7% p.a. interest respectively so you must always choose Small tenure with higher the rate of interest i.e. 1 year 7.6% p.a. to earn higher returns on the investments.

Liquidity

As liquidity is a major concern for investors for choosing right RD. There is a norm for premature withdraw, but investors have to pay penalty for the same and also the RD rate of interest varies on the deposit period, so investors must always look for offers higher rate of interest with a low premature penalty which the bank or financial institution provides.

Partial Withdrawal of Recurring Deposit

Most banks do not allow partial withdrawal, few banks may offer an alternative in the form of Loan or Overdraft facility that is made available by the deposit balance in RD account as security. the amount prematurely can be withdrawn, but the interest given will be lower than the original rate for the deposit period or that for the duration of the deposit which has been with the bank. Few banks may charge a penal interest of 1% – 2%. The principal amount is only returned if the premature closure is less than a month, because RD has a lock-in period of 1 month, therefore no interest is earned on the same.

Premature Withdrawals of Recurring Deposits

Interest will be paid to the account holder During the premature closure of a Recurring Deposit for reinvestment in a term deposit without reducing the interest rate by 1% as a penalty, only if the deposit after reinvestment remains with the bank for a longer period than the remaining period of the original deposit. But, if the account holder withdraws the deposited amount before maturity than the rate of interest receivable on the deposit will be applicable to the period for which the deposit has remained with the bank, along with a 1% penalty for premature withdrawal. A penalty of 1% will be imposed from the date of the original contract up to the date of premature withdrawal after reinvestment if the deposited reinvestment amount is withdrawn before the maturity period. After the due date of maturity of the deposit it the premature withdrawal is made, then the penalty is imposed till the date of premature withdrawal after reinvestment.

Difference between Fixed Deposit and Recurring Deposit

Fixed Deposit

Recurring Deposit

The FD schemes are usually for the duration of a minimum of 7 days and maximum 10 years. The investor can select the period that you are most comfortable.The customer has to deposit a fixed amount at with the fixed duration. In Recurring deposits usually, the period is not less than 6 months and not more than 10 years.
As there is no minimum or maximum limit in a fixed deposit scheme, it generally depends on the bank. Different banks have their minimum& maximum investment amount i.e. maximum limit as Rs. 1.5 lakhs per month and the limit as Rs. 100 for minimums.

 

As there is no minimum or maximum limit in RD, it generally depends on the bank. Different banks have their minimum& maximum investment amount i.e. maximum limit as Rs. 15 lakhs per month and the limit as Rs. 1000 minimum.

 

The rate of interest lies between 6.96% to 8.00%. it depends on the capital amount and period taken by the investor.

 

The rate of interest lies between 5.25% to 7.90% it depends on the capital amount and the monthly investment amount taken by the investor.

 

Tax exemption under the section 80C of Income Tax Act 1961 is applicable for the fixed deposit.TDS can be deducted 10% by the bank if the interest earned on the RD move above Rs 10,000 a year for recurring deposit.

 

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Chetan Chandak (B.Com, LLB)
Chetan is the Head of Tax Research at H&R Block (India) with an experience of more than a decade in tax advising. He is also a regular contributor for some of the leading news publications in India such as Economic Times, Financial Express and Money Control. Professionally, Chetan is fascinated by international taxation and expat-related tax research.

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