Recurring deposit (RD) is a trusted and popular financial scheme among the Indians of distinct age groups. You can open an RD simply with ease either through a post office or bank. This financial instrument requires you to make periodic deposits of a predetermined amount like SIP (systematic investment plan) to generate higher returns as compared to savings bank accounts. If you are aware about the corpus figure and time-period, then you can use an online RD calculator to compute the monthly contribution you must make towards RD to generate the returns of your preference.
How does recurring deposit account function?
RD stands for recurring deposit wherein you must make a monthly instalment. An RD endows you with the opportunity to grow your months savings over a specific time-period. Here’s an overview of how RD functions –
- After opening an RD account, you can make the monthly instalment with ease.
- The time frame of an RD account is generally between six months and ten years.
- The interest constituent is paid over your deposited funds and is generally compounded on a quarterly basis.
- At the RD maturity time, you get your investment alongside the interest constituent earned on them over the scheme’s time frame.
What’s a recurring deposit?
With the RDs, you as a customer get the flexibility of investing a specific sum as per your choice every month and save according to your convenience. This is the basic distinction between RD and FD. In the case of FD, you must provide a lump sum amount to generate returns in the form of interest on it. Same as RD, you can also use an online fixed deposit interest calculator to compute the overall interest you would generate on a specific contribution by you.
Most of the financial institutions provide an RD of tenure ranging anywhere between six months and ten years. The rate of interest stays fixed over the time-period and like FD, the principal constituent is received upon maturity, and you can select to get the interest constituent at periodic intervals or by the maturity time.
What are the recurring deposit account features?
Here are some of the important features of recurring deposit account, you must be well-versed with –
Fixed income investments –
RDs are a kind of fixed income instrument that provides assured return upon maturity. You are aware about the interest rate before investing your funds in the investment. Additionally, the rate of interest does not change in the course of the deposit period.
Minimal investment –
The minimal contribution as investment required for opening an RD is just Rs 100 every month. If you hold a sizable surplus income like Rs 1,000, then you can park the amount every month through the recurring deposit mode to accumulate the corpus of your preference.
Time – period –
You as an individual can open an RD account for a minimum of six months and for up to a time-period of ten years. RD endows the flexibility to select the time-period according to your comfort and convenience.
High interest rate –
The rate of interest offered by RDs are higher as compared to the regular savings bank account. Most financial institutions compound the interest post every quarter.
Lock-in period –
An RD account has a lock-in of between thirty days and three months, which may be subject to the provider’s discretion. Any RD withdrawals during the lock-in term will not provide you with any interest constituent.
Premature withdrawal –
You as a customer are permitted to make the premature withdrawal as per the RD rules with a charge or penalty being levied.
Loan option –
You get a loan or overdraft option against the RD. Default payments on loan are primarily adjusted against the amount available in your RD account.
What must you know about the RD rate of interest?
RD stands for recurring deposit, which is nothing but a risk-free investment choice and one of the popular options available. You can earn interest constituent on the amount invested according to the rate of interest provided by the financial institution.
The rate of interest for the RD is estimated post factoring in distinct parameters such as the invested funds, time-period and RD scheme selected. You can compute the interest constituent using the below listed formula –
M = R [(1 + i) n – 1] / 1 – (1 + i) – 1/3
Here, in this formula –
M = maturity value
i = interest
n = number of quarters
RD is safe and provides assured returns as RD rate of interest is constant. It is important for you to compare the recurring deposit interest rates provided by distinct financial institutions before investing in RD or renewing your prevailing investment. Also, it is a prudent option for you to make an RD investment at the maximum rate of interest available to get the highest returns.
Parameters to factor in before opening a recurring deposit account?
After understanding “what is a recurring deposit?” Let’s look at the crucial parameters that you must factor in before investing in any RD scheme. Mentioned here are some of the important parameters you must consider before you open an RD –
Investment amount –
As per the RD account, the minimal investment amount needed is Rs 100. As it does not need a lot of funds for opening the account, an RD is a convenient financial scheme. Figuring out your investment is a crucial parameter you must consider before opening an RD account.
Repayment tenure –
The tenure period of recurring deposit ranges anywhere from six months to ten years. Once you open a recurring deposit account, you cannot alter the repayment tenure until the maturity date of the recurring deposit. Ensure you select the tenure according to your requirements to get the maximum returns.
Rate of interest –
You can get interest constituents on your investment per month. The rate of interest might differ from one financial institution to another. Thus, it is best for you to choose the recurring deposit option that provides you the highest rate of interest.
Taxation on the interest constituent –
The interest generated on RD gets taxed. The minimal taxable interest constituent equals Rs 40,000. So, in the case interest constituent earned on your RD is below Rs 40,000 (or for senior citizens is Rs 50,000), zero tax is deducted by the financial institution. In the case you submit a 15G or 15 H form to the financial institution stating your income is less than the tax limit, the financial institution will not levy any tax.