Recurring Deposit (RD)

A recurring deposit (RD) is a popular investment option where an investor deposits a fixed sum of money at periodic intervals for a fixed tenure. The interest rates on RDs are fixed, but generally, they offer higher returns than savings accounts. RDs are flexible investment options, and the interest earned is taxable. In this article, we will learn about different aspects of recurring deposits.

What is Recurring Deposit (RD)

A recurring deposit (RD) is a term deposit offered by many Indian banks and post offices that allows people to make regular deposit into their recurring deposit account and earn decent interest. It is an investment tool that provides flexibility and ease of investments to individuals. RDs are different from fixed deposits as they are flexible in most aspects. An RD account holder can choose to invest a fixed amount each month instead of investing a lump sum amount at once.

While RD offer a convenient way to build savings over time, FD typically offer higher interest rates for those able to invest a lump sum.

Features of Recurring Deposit

Below are some key RD features that can vary across financial institutions:

RD features like flexible deposit amounts and tenure make it suitable for different financial needs. One of the key advantages of RD is that it offers fixed interest rates, ensuring steady returns. While some financial institutions allow early withdrawal, it is often subject to penalty charges, so it is advisable to check the terms beforehand.

Setting up standing instructions allows hassle-free monthly deposits into the RD from your savings or current account, making it a convenient investment option for disciplined savers.

Types of Recurring Deposits (RD)

Here is a list of types of RDs:

1. Regular RD accounts

Tailored for Indian residents aged 18 years or above, regular RD accounts facilitate fixed monthly deposits over a predetermined period. The interest calculated using compound or simple interest methods, depends on the account's tenure.

2. RD accounts for minors

Accounts for minors, below 18 years, can be opened under parental or guardian supervision. Like regular RDs, fixed monthly instalments and a specified tenure are established at account initiation, with returns comparable or slightly higher than regular RD.

3. RD accounts for senior citizens

Different financial institutions offer specialised RD accounts for senior citizens (aged 60 and above), providing potentially higher interest compared to regular accounts. Interest compounds quarterly in these accounts, catering to the financial needs of the senior citizens.
For even greater returns, consider a Bajaj Finance FD alongside your senior citizen RD. Bajaj Finance offers senior citizens additional interest of up to 0.35% p.a. on their FD.

4. NRE/NRO RD accounts

Non-Resident Indians (NRIs) can opt for Non-Resident External (NRE) and Non-Resident Ordinary (NRO) RD accounts. These accounts enable NRIs to earn competitive interest and systematically invest in recurring deposit.

How to open an RD account online

Here are the steps to open an RD account online:

1. Log in to your account via net banking or mobile app.
2. Click 'Open an e-RD Account' on the dashboard.
3. Specify the account number, instalment amount, and duration. Check the applicable interest rate and nominate a beneficiary for account proceeds.
4. Tick the checkbox to agree to the terms and conditions.
5. Submit the application.
6. A confirmation message will be displayed, and an email with the RD receipt will be sent to your registered email address. The specified amount will be debited.

Note: This process of opening an RD account online may differ for different financial institutions.

Returns on Recurring Deposit (RD)

The returns on a Recurring Deposit depend on factors like the deposit amount, tenure, and interest rates on RD. Since interest is compounded quarterly, RD offers steady and predictable growth. You can use the RD calculator to estimate the maturity amount and plan your savings more effectively.

Eligibility for a Recurring Deposit

• Recurring Deposit accounts are open to everyone.
• Minors above the age of ten can open an RD account by providing valid proof of identity.
• Minors under the age of ten can open an RD account under the guardianship of a parent or legal guardian.
• Corporations, firms, sole proprietorships, and business enterprises are eligible to open RD accounts.
• Government institutions can also open a Recurring Deposit account.

Documents required to open a Recurring Deposit account

Here is a list of documents required to open an RD account:

• Application form: Complete the designated application form provided by the financial institution.
• Photograph: Attach passport-sized photographs of the account applicant.
• ID and address proof: Furnish a valid ID proof (Aadhar card, passport, voter ID, or driver's license) and an address proof (utility bill or Aadhar card).
• KYC documents: Provide KYC documents as per the financial institution's requirements.

Also Read: 5 Year RD in Post Office

Benefits of Recurring Deposit (RD) investment

Recurring Deposit (RD) is a secure and disciplined way to grow your savings over time. It is ideal for individuals with regular income who want to build a lump sum gradually without taking market risks. Here are the key benefits of investing in an RD:

• Low risk investment: RD is not market-linked, making it a stable option for conservative savers.
• Flexible tenure: You can choose your RD tenure based on your financial goals—typically ranging from 6 months to 10 years.
• Attractive RD interest: Many banks and NBFCs offer competitive RD interest rates, helping you earn consistent returns.
• Monthly savings habit: RD promotes financial discipline by encouraging regular monthly deposits.
• Easy to start and manage: Opening and managing an RD account is simple and can be done online with minimal paperwork.

Overall, RD is a reliable investment for those seeking safe returns and predictable growth.

Important factors to consider before applying for Recurring Deposit

Here is a list of important factors to consider before applying for RD:

1. Interest rate

One of the primary factors to consider is the interest rate offered by the financial institution. Interest rates may vary among financial institutions, and a slightly higher rate can significantly impact the returns on your investment. Compare rates across different financial institutions to make an informed decision.

2. Tenure options

RDs come with varying tenure options, ranging from a few months to several years. Assess your financial goals and choose a tenure that suits your needs. Keep in mind that longer tenures generally give higher interest rates, but they also mean committing to a more extended saving period.

3. Penalty for premature withdrawal

Most financial institutions provide the option for premature withdrawal. If you opt for an early withdrawal, the interest will be calculated based on the completed tenure, and the financial institution will impose a penalty. Therefore, it is advisable to select a financial institution with a higher interest rate and a lower penalty on premature withdrawal before making your investment decision.

4. Minimum and maximum deposit limits

Different financial institutions may have different limits for minimum and maximum deposits. Ensure that these limits align with your financial goals. Some financial institutions may allow flexible deposit amounts, accommodating changes in your monthly budget.

5. Tax implications

Consider the tax implications of the interest earned on your RD. TDS (Tax Deducted at Source) is applicable if the interest income exceeds a certain threshold. Understanding the tax implications will help you plan your finances better.

Bajaj Finance FD vs Recurring deposit

Renewals & withdrawals of an RD

If an RD is closed early and the proceeds are reinvested in a term deposit, interest may be paid without applying the usual 1% penalty—provided the new deposit is held for a period longer than the remaining tenure of the original RD.

However, if the funds are withdrawn before maturity, the interest paid will be based on the actual period the money remained with the bank, along with a 1% premature withdrawal penalty. If the deposit is withdrawn before maturity even after reinvestment, the 1% penalty is calculated from the original contract date to the premature withdrawal date.

If withdrawal occurs after the original maturity date, the penalty is applied from the reinvestment date to the premature withdrawal date. RD renewal and withdrawal rules may vary across banks.

Partial Withdrawal of a Recurring Deposit (RD)

Banks do not allow partial withdrawals from an RD account. However, some banks offer an alternative by providing a loan or overdraft facility against the RD balance, using it as collateral. Premature withdrawal of an RD is permitted, usually with a penalty of around 1% on the applicable interest rate for the period the deposit remained with the bank.

While partial withdrawal is generally not allowed, post office RDs offer a limited exception. If the RD has been active for at least one year, a portion of the amount can be withdrawn and treated as a loan, which must be repaid in a lump sum.

If an RD is closed prematurely, the interest paid is typically lower than the original contracted rate and may also attract a penal interest of 1%–2%, depending on the bank. An RD has a minimum lock-in period of one month. If closed within this period, no interest is paid and only the principal is returned.

Taxation of RD Interest (Tax-Saving Aspect)

Interest earned on an RD is fully taxable. Tax Deducted at Source (TDS) is applied based on the depositor’s income and the interest earned, subject to applicable thresholds.

• Annual income below ₹2.5 lakh:
  TDS of 10% is deducted if RD interest exceeds ₹10,000 in a financial year. If total income is below the taxable limit, the deducted TDS can be claimed as a refund by submitting Form 15G.
• Annual income between ₹2.5 lakh and ₹5 lakh:
  TDS at 10% applies on RD interest exceeding ₹10,000.
• Annual income between ₹5 lakh and ₹10 lakh:
  The bank deducts 10% TDS, but the actual tax liability is higher (as per slab). The balance tax must be paid while filing the income tax return.
• Annual income above ₹10 lakh:
  Although the bank deducts only 10% TDS, interest income is taxed at a higher slab rate, and the additional tax payable must be settled at the time of filing the return.

Conclusion

Recurring deposits serve as an easy and secure investment option, fostering financial discipline while catering to diverse needs. Whether for minors securing their financial future or senior citizens seeking additional returns, RDs provide a structured path towards wealth creation.

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