A recurring deposit is a type of term deposit which allows people to save a fixed amount every month. Banks and the Post Office offer these schemes where people can contribute a small sum to build a fund, and also earn interest. This investment option works out well for salaried individuals. Generally, recurring deposits span over a period of 6 months to 10 years. A recurring deposit can be opened with as little as Rs. 10.
Features and Benefits
The interest you earn on a recurring deposit depends on the amount you contribute and the tenure of the deposit. The rates of interest offered by banks is similar to the interest rates offered on term deposits.
The tenures offered will differ between banks. Usually the minimum tenure is 6 months and the maximum tenure is 10 years.
Upon maturity, the bank will pay you the sum you have saved plus interest accumulated. This money will either be paid in cash or be credited to your bank account. The maturity value of your deposit will be indicated when you open the RD account.
Banks accept RDs as collateral to avail of loans. One can take a loan of 80% to 90% of the value of the deposit.
Tax Deducted at Source
Recurring Deposits recently were brought under taxable income. With effect from June 2015, tax deducted at source (TDS) is applicable on recurring deposits. If the interest on these deposits exceeds Rs. 10,000 per annum, then 10% would be deducted at source. The RD holder will also have to declare interest earned and pay income tax on this amount.
Banks levy a penalty if you miss the monthly deposit by the due date. There are some banks that waive this penalty.
Most RDs can be closed ahead of the maturity date. A penalty charge plus a penalty on the interest rate may be levied.
How to open a Recurring Deposit
Recurring deposits can be opened in two ways.
- Approach your bank or the post office. You need to fill out a form and may be required to submit ID proof. You can then make the first deposit and open the account.
- If your bank has internet banking facilities, you can log into your account and open the RD.