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Bank Recurring Deposits

Albert Einstein once said, “The most powerful force in the universe is compound interest.” When someone as brilliant as him talks about the power of compounding, one tends to listen! Recurring deposit

Albert Einstein once said, “The most powerful force in the universe is compound interest.” When someone as brilliant as him talks about the power of compounding, one tends to listen! Recurring deposit offers compounding; the fact that interest increases the value of interest as well as the value of principal.

You need to be a Resident Indian with a savings bank account

Entry Age
• You need to be over 18 years old
• Minors can open a deposit with the natural guardian operating it

• Minimum: Rs 5 per annum
• Maximum: No limit
• Senior citizens qualify for special interest rates

• Depends on tenure of the deposit (see table for current rates)
• Starts from 6.75 per cent to 9 per cent per annum

• Currently offered for ten years

Account holding categories
• Individual
• Joint
• Hindu Undivided Families (HUF) not engaged in any trading or business activity
• Companies or Associations or Trust
• Minor through the guardian

Facility is available

A recurring deposit (RD) is a type of bank deposit wherein one saves predefined sums of money every month in an account for a fixed tenure. The committed monthly investment earns a higher interest compared to savings bank account. The recurring deposit provides an element of compulsive savings at a higher interest rate depending on the tenure of the deposit.

The interest rates offered by banks on such deposits depend on the number of days, weeks or months for which the recurring deposit is maintained. There is great flexibility in the maturity period which ranges from 6 months to 10 years. The interest is higher in case of longer maturity periods, but largely depends on prevailing interest rates.

Investment Objective and Risks
The prime objective of the recurring deposit is to earn better interest on savings compared to what an ordinary savings bank offers and instil discipline to save regularly.

Capital Protection
The capital in a recurring deposit is not fully protected. Till recently, all bank deposits were insured under the Deposit Insurance and Credit Guarantee Scheme of India, which now has been made optional exposing the deposits to risks if the bank is not insuring deposits.

Inflation Protection
The recurring deposit is not inflation protected, which means whenever inflation is above the deposit interest rate; the deposit earns no real returns. However, when the interest rate is higher than inflation rate, it does manage a positive real rate of return.

The interest rate is fixed and guaranteed for the duration of the recurring deposit at the commencement of the deposit.

The recurring deposit is liquid, even if the depositor defaults on a payment during the account’s tenure. The liquidity is offered in the form of loans and withdrawals subject to conditions.
• Loan up to 90 per cent of the deposit balance is available at the discretion of the bank at a rate fixed by the bank, which varies from time to time. The loan interest rate has to be more than the interest rate on the closed RD account.
• The deposit can be closed prematurely at the cost of losing the interest it earns.

Credit Rating
Recurring deposits do not carry any credit rating.

Exit Option
Premature closure of a deposit is permissible with a penalty.

Other Risks
• Interest rate changes pose risks to existing deposits; for instance, you may have locked-in at a lower interest rate but due to the economic factors, the bank starts to offer a higher rate on deposits later.
• If the bank where you have the deposit does not have deposit insurance and credit guarantee, you run the risk of losing the capital and the interest.
• A bank has special powers to end a RD account before its maturity.

Tax Implications
There is no tax advantage on these deposits, with the interest earned on maturity treated as income from other source when computing income tax.

Where to Open a Deposit
You can open a recurring deposit at any nationalised, private sector or foreign bank.

How to Open a Deposit
• Select the bank branch to open the deposit.
• Choose a nominee and get a witness signature.
• Your existing bank account counts as being KYC compliant.

How to Operate a Deposit
•You can issue a cheque to the bank through your existing savings bank account to start a deposit. Future payments can be instructed through direct debt from your account to the RD account.
• A recurring deposit passbook is issued with deposit features.
• Passbook needs to be updated to track the monthly deposits.

Types of Transactions
• Cheque
• Money transfer
• Electronic clearing service (ECS)

Points to Ponder
• Minimum sum needed to start a deposit
• Penal provisions in case of partial or early foreclosure

Tips and Strategies
• Check the rates of interest for different banks for different tenures.
•Some banks offer flexible or variable recurring deposits. In these flexible RDs the person is allowed to deposit even higher amount of instalments, with a fixed upper limit.
• Use direct transfer from your bank account to keep an RD account active and from missing payments.
• Before investing in a deposit it is important to consider the rate of interest and the inflation rate. A high inflation rate can eat into your real returns. So, it is vital to have a look at the inflation rate before arriving at the real rate of interest.

Going Online
With online banking access, you can initiate recurring deposits and regularly save without any defaults with the seamless transfer of funds from your savings account to the recurring deposit account.
• Flexibility in deciding the amount, tenure, interest payment and maturity of your deposit.
• At the time of maturity, the balance automatically transfers to your bank account.