Have you ever thought to save your money but in a manner that does not create a hole in your pocket and increases your worth?
Yes of course !!
In India the saving culture came from the fixed deposits facility but alot of savers were unable to get benefits from it due to low surplus amounts.
Due to which the feature of recurring deposits evolved in the financial world where anyone to almost everyone can save or invest in a systematic manner.
What Are Recurring Deposits?
“Recurring Deposits” or RD are banking facilities that enable users to save a certain specified amount every month for a pre-determined time period and earn interest on it.
This saving plan inculcates systematic expenditure and does not requires lumpsum surplus in hand.
Being a regular plan it provided utmost flexibility with regards to term deposits and hence attract the users who look for regular savings and less risky investments with stability.
Saving amounts are flexible and can be decided by the user whereas the interest rates once decided remains the same till the end term.
Generally, the duration of RD ranges from 6 months to 10 years. The user, in the end, gets the whole initial savings and interest earned through the term as a lumpsum amount.
Minimum amount to start recurring deposits stands at ₹10. Normally, the interest is calculated on quarterly compounding basis for recurring deposits.
Recurring deposits, therefore, have features of fixed deposits with benefits of flexibility.
Types of Recurring Deposits
Regular recurring deposit account
This scheme is most commonly used and is widely available in the services of all the banks. The scheme is operational once the amount and tenure are decided.
Age of eligibility : anyone who attains the age of 18 years.
Once the scheme is operational no additional sums can be added to the account and full withdrawal is allowed at the end of the tenure.
The minimum amount and tenure vary from bank to bank. Interests can be based on simple or compounded principles.
Recurring deposits account for minors
Not all, but some banks do give the offer for opening RD accounts for minors below 18 years of age.
This works under the supervision of their guardians and the money can either be used for education or any needs of the minor.
Senior citizen recurring deposits account
Banks provide RD for senior citizens with the most preferred interest rates.
The interest rates for RD for senior citizens are higher than that of regular RD.
However, the interests are compounded quarterly, and the minimum amounts and tenure are predecided.
Tax saving recurring deposits accounts
Since the interest earned on recurring deposits is taxable, these schemes tend to save on tax by using different components of diversification, tenure and amounts.
The schemes may largely vary from one bank to another.
NRI/NRE recurring deposits account
Banks also do give options for recurring deposits to NRIs.
This is the best alternative to keep money in India for NRI’s as the interest rates for them are pretty high.
There are two options available for NRIs namely :
Non-resident external (NRE) account
The interest rates are high for NRIs. The amount for monthly installments is debited from the NRE account after converting the foreign currency into India rupee and then deposited into the RD account.
These accounts are free from taxation in India.
Non-resident ordinary (NRO) account
NRO accounts are opened by NRIs to get their rental or any extra income in India. The RD schemes may take up from this account and convert into rupees before monthly installments are issued.
This scheme is taxable on 30% rates and CESS as well.
A cess short for “assess” is a form of tax that is levied by the government of a country to raise funds for a particular purpose like health, education, etc. .
Who Should Invest In Recurring Deposits ?
As we have discussed above, recurring deposits are for those who want systematic savings and have a low-risk appetite with fewer interest requirements.
Surely based on these three characteristics, targetted financial investors for recurring deposits are :
Being a salaried employee means regular income and expenses but can bear some savings in small proportions regularly. This helps in savings and is a good kick-start to the investment journey with lesser risk.
Small businesses with low investments and slow revenue growths need a safety cushion to fall back on.
The safety cushion is recurring deposits, that can save the owner from bankruptcy in times of revenue loss to cover expenses. Savings is what we do to save the boat and keep it sailing.
Students or gig workers
Students or small gig workers, with lesser money in hand and more requirements of savings can use recurring deposits as tools to save and grow the small amount.
Calculate Final Amount
The amount of interest and final payment depends upon several calculations and generally the interest is compounded quarterly.
M =R[(1+i) n – 1]/1-(1+i) (-1/3)
For example, if Mr. Shyam, a salaried employee with ₹ 10,000 as remuneration wants to save ₹ 100 per month for 12 months, the best plan could be a recurring deposits service.
Now suppose that interest rates are compounded quarterly at a rate of 5%. In this set-up, the amount that he will get after maturity is ₹ 1,233 and the interest earned is ₹ 33.
Procedure To Invest
Recurring deposits are made to be flexible due to the ease of opening recurring deposit accounts. Anyone can open an RD account in their bank or any other bank of their choice.
- Firstly the form has to be filled via online or offline mode and then the bank will approach you for your further documents, details and KYC.
- Once the documentation is done, the next step is to link the account from which recurring amounts will be deducted and added to the RD account.
After all the necessary steps you are good to start your investing journey.
Eligibility for opening a recurring deposits account :
- Any individual adult ( age 18 or above years) is eligible.
- Minors above ten years of age with name proofs.
- Minors of or below the age of 10 years with a guardianship.
- Any company or commercial organisation can open a recurring deposits account.
- Any government organisation is eligible.
The Taxation System For Recurring Deposits
Taxation is an integral part of a financial asset that gives you benefits. Here also recurring deposits are subject to taxation in numerous rules and some exemption as well.
- Taxation is in the form of TDS (tax deducted at source). The sum deposited in the RD account is counted as the income of the user and therefore interest earned from the RD account is taxable at 10%. However, no tax obligation is charged if the interest amount is up to ₹10,000.
- If the user fails to provide account and PAN details, the TDS will be charged at 20%.
- Any user having an annual income below ₹50 lakhs and earning interests more than ₹10,000 on RD is to be charged with 10% TDS.
- If the income is above ₹50 lakh to ₹1 crore and interest earned exceeds ₹10,000 then a surcharge of 10% is counted on TDS.
- Surcharge of 15% is applied for TDS on interests earned if annual income ranges from ₹ 1 to ₹ 2 crores.
- If the income bracket is between ₹2 to ₹5 crores or ₹5 to ₹10 crores, the surcharge for TDS on interest income is applied at 25% and 37% respectively.
Loans Against Recurring Deposits
Recurring deposits can be treated as collateral for generating loans.
The only restriction is that you must have the recurring deposit in the same bank where you want to opt for the loan.
The loan limit varies from bank to bank but the general bracket lies between 80% to 90% of the total deposit in the RD account.
In default case, the loan amount is recovered from the recurring deposit accounts balance.
The interest charged on loans against recurring deposits is much lower than that of normal personal loans in India.
Things To Keep In Mind
- Goals that you aim at achieving if your goal is to minimise expenditure and get some hands-on savings then RD can be a great option.
- Risk and return calculations are a very first and important steps toward savings and investment.
- Know and compare interest offered by different banks for recurring deposits.
- Knowing terms and conditions for withdrawal of funds early to the maturity period.
- Penalties if any due to the delayed payments of regular amounts.
India’s Top 5 Schemes
In Repco bank , there are two schemes flexible and fixed. In flexible, interest is debited to your account quarterly, whereas interest is paid at maturity in fixed.
SBI Recurring Deposit and HDFC Bank Recurring Deposit can provide an interest at the rate ranging from 4.40% to 5.40% and 4.40% to 5.50% respectively.
Bank RDs vs Post office RDs
Recurring deposits can be opened in private banks or even in government-owned post offices. The major rules that operate in both are :
Banks are more profit-making financial institutions and thus interest rates are comparatively lower than the post offices.
- The interest rates generally vary between 2% to 6%.
- You can start with an investment of ₹ 1,000 and in multiples of ₹ 100 after that. The maximum limit is however around ₹ 1,99,99,900 a month.
- The tenure ranges from 6 months to 10 years generally, however, specific tenure varies from bank to bank.
The premature RDs are subject to penalties and therefore less liquid than the post office recurring deposits account.
- The interest rate is 5.8% per annum which is compounded quarterly.
- A monthly deposit must be at least ₹ 100, with multiples of ₹ 10 as a minimum. There is no maximum limit set for post office RDs.
- The RD matures after 5 years of tenure nearly 60 months of installments. It is flexible in the sense that the user can withdraw the sum in between the tenure at the stage when RD time has reached 3 years.
Advantages of Recurring Deposits
Recurring deposits are flexible in terms of customer requirements, time period and amounts. More liquid than fixed deposits and easy to access.
Recurring deposits are best suited for short-term investments and compile savings for future use.
Low Investment requirement
The best fact about recurring deposits that makes them attractive is that anyone can enter with any amount. The lowest to ₹ 10 is the best feature of recurring deposits.
The safe and secure
Safest form of savings with some interest is an all-time favourite for Indians who prefer risk-free money.
Disadvantages Of Recurring Deposits
As far as recurring deposits are concerned any premature withdrawal will lead to penalties and therefore crash your savings.
Interest rates are quite low for recurring deposits as compared to other plenty of options hanging around all over financial markets.
Stringent monthly payment timelines
Any late payments will lead to strict penalties and therefore will vanish the savings rather than protecting. It is very important to be on time.
Inflation being the most dangerous threat to financial markets have a huge impact on recurring deposits. Since inflation rates are highest in the decade right now, the returns from any fixed-income assets have dropped down to negative. Since interest rates in RDs are predetermined but inflation is dynamic, as inflation goes up at the same interest rates, the real returns drop down.
Since we have discussed the structure of recurring deposits in India, we now know how important it is to handle our savings. Savings are indeed what will grow your wealth!
Often keeping cash balances lead to a loss of opportunity profits in terms of interest rates. Recurring deposits provided for safe and secure saving habits with the opportunity to maximise gains in the lowest of risk alternatives.
Recurring deposits and rules are under the government’s eyes and therefore create a reliable option for investing.
However due to the predetermined nature of interest and tenure, it might be a plight that your money is subject to penalties when you need it the most, therefore limited liquidity.
The dynamic world and ongoing power of inflationary pressures have put the economy through the worst possible scenarios. This is indeed a big threat to the safe fund of recurring deposits as savers would be at losses.
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