All about recurring deposits

The recurring deposit (RD) is one of the most basic financial products available it the market. It can be used as a tool to inculcate the habit of saving.

What is a recurring deposit?
An RD is a type of term deposit offered by banks and non-banking financial companies. There are two types of RDs-regular and flexible. A regular RD is offered by all banks, while only some offer flexible ones. A regular RD allows you to deposit a pre-specified amount at pre-decided intervals. It becomes a compulsory investment. The instalment amount once fixed, cannot be altered. For instance, if you sign up with a bank to invest ₹1,000 every month for 12 months in a regular RD, you will have to invest the specified amount at a fixed date every month. In a flexible RD, you can deposit any amount, on any day, and any number of times. Other than visiting the branch to open an RD, nowadays many banks allow you to open using the Net banking facility as well.

How does it work?
According to loan comparison website, Deal4loans, you can start an RD with a minimum amount of ₹10, but it can vary from bank to bank. The tenure ranges from three months to 10 years. Some banks have a lock-in period of 1-3 months. The money you invest in an RD, earns interest, and it gets compounded. Data from Deals4loans shows that as of June, interest rates on RDs were in the range of 7-9.10% per annum, depending on bank and tenor chosen. Senior citizens get an additional 15-25 basis points as interest. (One basis point is one-hundredth of a percentage point.)

In a regular RD, in case of delayed instalments, a penalty is charged as a flat fee or a percentage of the amount. For instance, with ICICI Bank Ltd, the depositor is liable to pay monthly interest at the rate of ₹12 per ₹1,000, and it depends on time and the amount. If you withdraw the amount before the maturity date, you will have to pay 0.5-2% as penalty, depending on the tenure. You cannot withdraw partially.

Some banks allow you to take a loan against the deposit. Generally, the loan amount can be 75-90% of the deposit value. For instance, State Bank of India allows you to take a loan of up to 90% of the deposit amount at an interest of 0.5% per annum above the interest rate of the RD.

What should you do?
It can also be useful for those who do not have access to financial instruments such as equity or debt. If you are in the lowest tax bracket or have no taxable income and are looking for guaranteed returns, it may work for you.

However, you should know that since RDs come under the definition of time deposits, the interest earned will attract tax deducted at source (TDS). So, TDS will be applicable if the interest earned on the RD (or if you have more than one with the same bank) exceeds ₹10,000. If you come below the income tax bracket, you can avoid the TDS by filing Form 15G or 15H.

In arrangement with HT Syndication | MINT

This article was originally published on March 09, 2017.