Introduction Investing in a financial instrument is one of the best ways to grow your wealth. A recurring deposit is an excellent investment option that helps you save a specific amount of money regularly and earn interest on it. This article aims to explain what a recurring deposit is, how it works, and its advantages and disadvantages.
What is a Recurring Deposit?
A recurring deposit is a type of investment that allows individuals to save a fixed amount of money regularly for a specific period. It is similar to a fixed deposit (FD) but differs in terms of the deposit amount and tenure. In an FD, the entire lump sum amount is deposited at once, and the term could be as short as a few months to several years. However, in a recurring deposit, you save a fixed amount of money at regular intervals (monthly or quarterly) for a specific period, usually ranging from six months to ten years.
How Does a Recurring Deposit Work?
When you opt for a recurring deposit, you have to deposit a fixed amount every month for the term. The minimum amount varies from bank to bank and ranges from as little as Rs. 100 to Rs. 5000. You can choose the deposit amount and the duration of the term, depending on your financial goals.
The interest rate offered on recurring deposits is usually fixed and ranges from 5-8%. The interest is calculated every quarter and is credited to the account at the end of the term.
Benefits of a Recurring Deposit
a. Guaranteed Returns: A recurring deposit offers guaranteed returns on your investment. The interest rate is fixed for the entire term, which means you know how much you will earn at the end of the term.
b. Flexible Investment: You can invest in a recurring deposit with a small amount of money, which makes it a great option for people who cannot afford to make a lump sum investment.
c. Regular Savings: A recurring deposit helps inculcate a habit of saving money regularly, which is essential for achieving your financial goals.
d. Tax Benefits: The interest earned on a recurring deposit is taxable as per the income tax rules. However, if you have invested in a five-year tax-saving recurring deposit, you can claim a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
Drawbacks of a Recurring Deposit
a. Low Returns: The interest rates offered on recurring deposits are lower compared to other investment options like mutual funds or stocks.
b. Limited Liquidity: Unlike a savings account, you cannot withdraw money from a recurring deposit account whenever you want. There are penalties for premature withdrawals, which can reduce the interest earned on the deposit.
c. Inflation Risk: Inflation can erode the value of the returns earned on a recurring deposit over time.
Types of Recurring Deposits
a. Regular Recurring Deposit: This is the most common type of recurring deposit, where you have to deposit a fixed amount every month for a specific period. The interest rate is fixed for the entire term.
b. Senior Citizen Recurring Deposit: This is a recurring deposit scheme for senior citizens. The interest rate offered is higher than the regular recurring deposit.
c. Tax-Saving Recurring Deposit: This is a five-year recurring deposit, where you can claim a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. However, the interest earned on this deposit is taxable.
How to Open a Recurring Deposit?
Account Opening a recurring deposit account is a straightforward process. You can visit your bank’s website or the nearest branch to apply for the account. You will need to fill up an application form, provide your KYC (Know Your Customer) documents, and deposit the initial amount. Once the account is activated, you can start depositing the fixed amount every month as per the terms of the deposit.
Final Conclusion
A recurring deposit is an excellent investment option for individuals who want to save money regularly and earn guaranteed returns. It is a low-risk investment that is ideal for people who do not want to invest in high-risk options like stocks or mutual funds. However, before investing in a recurring deposit, you should consider your financial goals, the interest rates, and the tenure of the deposit. With careful planning and investment, a recurring deposit can help you achieve your financial goals in the long term.
Other Related Blogs: Section 144B Income Tax Act
Frequently Asked Questions:
Q:1 What is a Recurring Deposit?
A: A Recurring Deposit (RD) is a type of investment scheme offered by banks and financial institutions that allows customers to save money regularly for a fixed period. Under this scheme, customers can make regular deposits into their RD account and earn a fixed rate of interest on the accumulated amount.
Q:2 How does an RD work?
A: An RD works like a regular savings account, but with fixed deposits made at regular intervals. Customers need to choose a fixed amount that they want to save every month, which is then automatically deducted from their savings account and deposited into the RD account. The interest rate on the accumulated amount is fixed and is paid out at the end of the tenure.
Q:3 What are the minimum and maximum tenures for an RD?
A: The minimum tenure for an RD is usually 6 months, while the maximum tenure can be up to 10 years. The exact tenure and the interest rate offered may vary depending on the bank or financial institution.
Q:4 Can I withdraw money from my RD before the maturity date?
A: Yes, customers can withdraw money from their RD account before the maturity date, but they may be charged a penalty for doing so. The penalty may vary depending on the bank or financial institution.
Q:5 What happens if I miss a payment on my RD?
A: If a customer misses a payment on their RD, they may be charged a penalty for the same. Moreover, the interest rate on the accumulated amount may also be reduced, which can lower the overall returns.
Q:6 Is the interest earned on an RD taxable?
A: Yes, the interest earned on an RD is taxable as per the income tax laws in India. The tax is deducted at the source by the bank or financial institution and reflected in the customer’s Form 26AS.
Q:7 Can I open an RD account online?
A: Yes, most banks and financial institutions allow customers to open an RD account online. The customer can simply visit the bank’s website or use their mobile app to open the account and start making regular deposits.
Q:8 What is the difference between an RD and a fixed deposit?
A: The main difference between an RD and a fixed deposit (FD) is that in an RD, the customer makes regular deposits at fixed intervals, while in an FD, the customer makes a lump sum deposit for a fixed tenure. The interest rates offered on an FD may be higher than an RD, but an RD provides the convenience of making regular small deposits.
