Everything you need to know about recurring deposits!
03 Jul 2019
Looking for an easy saving tool? A recurring deposit (RD) may be the answer to your question. So, what is recurring deposit? An RD account is one where you invest a specific amount of money every month.
But what is RD account for, you ask? Well, you earn an interest on your saving. It is a simple investment tool that helps you learn the discipline of investing money every month as well as earn interest on your investments.
Almost all banks offer RD accounts. The interest offered is different for every bank. It usually lies in the range of 5 to 8 % per annum.
What are the features of an RD account?
There are several aspects to an RD account. Some of the main features are:
- Minimum saving: You can start with a minimum saving of Rs10. It is a saving tool for all classes. An RD account gives you the chance to start saving low and grow eventually.
- Tenure: The minimum period for which you can invest in an RD account is six months. You can invest for up to 10 years.
- Interest rate: The interest earned on your RD account is comparable to other investment tools such as fixed deposits.
- Discipline: RD accounts help you develop the habit of saving on a regular basis.
- Loan against RD: You can avail a loan against your Recurring Deposit account, which acts as a collateral.
- Withdrawal: You can only withdraw at the end of the tenure. While premature withdrawals are not allowed, some banks may allow you to withdraw prematurely against a penalty.
What are the benefits of RD account?
There are various advantages of an RD account. Let’s look at some of these advantages:
- High returns: Most banks offer an interest on their RD account which is at par with other savings schemes such as the fixed deposit. Some even offer higher interest rates than savings account. You stand to earn high returns even by making small investments in the beginning.
- Start low: You can start an RD with as much as Rs10. It gives you the freedom to start with small investments. So, what is RD account for? You make small investments every month and earn interest.
- Simple process: Starting an RD account is very easy , especially if you have an existing savings account. In that case all you have to do is link the RD account to 6the savings account.
- Good for short-term goals: You can start saving in an RD to fulfil your short-term expenses. It also helps you inculcate the habit of saving money regularly.
- Save in piecemeal: An RD account lets you make small deposits at regular intervals, unlike other savings schemes that require you to deposit large amounts in a go. At the same time, the interest is at par with such schemes.
What is RD account if not an ideal saving tool for starters?
If you are new to investments and want to develop a habit of saving money, RD account is the right option for you. It is also ideal for people with low incomes who want to save money for achieving short-term goals.
Difference between Fixed and Recurring deposits
Understanding the differences between fixed deposits and recurring deposits
The process of wealth creation requires discipline. Money must be put away systematically, over a period of time for wealth to grow. Whether you choose to invest in the stock market, commodities market, mutual funds or even opt for conservative methods of savings such as fixed deposits and recurring deposits; each way of savings comes with its own set of features and benefits. Most people begin with small monthly savings in the form of a recurring deposit, which they convert into a fixed deposit upon maturity. But this is just one way to go about it. In this article, we shall highlight the key differences between fixed deposit and recurring deposits. However, to do so, we need to understand what a fixed and a recurring deposit actually is.
Recurring deposit v/s fixed deposit
Fixed deposits or FDs (also so known as term deposits) refer to the financial instruments provided by banks through which one can lock away a sum of money for a specific duration and earn a monthly, quarterly, half-yearly, annual or cumulative interest at the end of the term. As the term ‘fixed’ suggests, one cannot withdraw money from a FD until the end of the term. Should you choose to ‘break’ your FD prematurely, you have to pay a penalty to the bank. A recurring deposit, on the other hand, refers to a disciplined way of putting away a fixed sum of money in an account every month. One needs to open a special recurring deposit account and can earn the same interest rate as offered on FDs. RDs are a great way to put away savings every month until a more substantial amount of money is accrued, which can then be put away as an FD.
FDs and RDs – key differences
Let us look at the main differences between FDs and RDS
The purpose of the deposit: Investors can put away their idle savings in an FD and earn a specific rate of interest, which is higher than the interest accrued when the money is sitting idle in the savings account. RDs, on the other hand, allow one to inculcate a disciplined habit of saving a fixed sum of money every month.
The duration of the deposit: You can open a fixed deposit for a minimum duration of 7 days, whereas the maximum duration of the deposit is about 10 years. On the other hand, the minimum duration for the RD is six months, whereas the maximum deposit tenure is 10 years.
Renewals and withdrawals: With regards to fixed deposits; one can roll over a deposit for another term, which may be different from the original term chosen. If you do not opt to withdraw an FD, the bank can auto-renew the deposit, but the interest rate may be lower, higher or the same; depending upon the prevailing rate of interest as offered by the bank. However, if you choose to withdraw the deposit before maturity, you have to pay a certain penalty. With regards to renewals and withdrawals of RDs, it is possible for one to close an RD before the chosen term and reinvest it into a term deposit; the account holder can earn an interest rate, with a 1% reduction as penalty. Also, it is not possible to make partial RD withdrawals. However, should you need money urgently; you can take a loan against your RD instead of breaking the deposit and withdrawing the cash.
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Everything you needed to know about tds on fd rates
A bank or financial institution is required to deduct TDS (tax deducted at source) at 10% from the interest income you earn on your fixed deposits and remit it to the central government, if the interest income exceeds Rs.10,000 in a financial year..
TDS is tax deducted at source. It is that part of your income that is directly paid out in the form of tax by the deducting agency, like your employer or your bank, before passing on the rest of the income in your hands.
In the Union Budget 2018, the Finance Ministry had increased the interest income threshold to Rs.50,000 for senior citizens. Only on exceeding Rs.50,000 as interest income, can the bank deduct TDS for senior citizens or those 60 years of age and above, under the new Section 80TTB of Income Tax Act.
When you have more than one deposit in different branches of the same bank, then the interest income from all the FDs is added up and 10% of this cumulative value is deducted as TDS.
What if a depositor’s annual income is below taxable income bracket?
Now, if a depositor’s annual income is less than Rs.2.5 lakh a year, and Rs.3 lakh in case of senior citizens, then the depositor is liable to pay no taxes. Under those circumstances, the depositor must submit Form 15 G or 15H right at the beginning of the year to prevent TDS from getting deducted from their interest income. Failing which, the depositor will have to file for refund at the end of the year, which can be tedious.
What is Form 15G and 15H?
Form 15 G
When a depositor’s annual income is less than Rs.2.5 lakh (or Rs.3 lakh for senior citizens) and tax due is nil, then the depositor must file Form 15G or Form 15H with the bank requesting the bank to not deduct TDS on interest income from FDs exceeding Rs.40,000 or, in the case of senior citizens, Rs.50,000.
Form 15H is similar to Form 15G, except that Form 15H is exclusively for senior citizens who are 60 years and above in age.
Conditions For Form 15H
The depositor should be 60 or above of age
Annual income should be less than Rs.3 lakh in case of senior citizens and Rs. 5 lakh for super senior citizens.
Should be a resident Indian.
Some examples of Form 15G/H
Mrs. Dsouza is 35 years old. Her annual income is Rs.2,35,000. The interest receipts on her FDs are Rs.50,000. What should Mrs. Dsouza do?
Mrs. Dsouza needs to submit Form 15G because her annual income is lower than Rs.2.5 lakh which is the minimum taxable income threshold. Since, her interest income is Rs.50,000, which is Rs.10,000 higher than the TDS exemption limit, the bank will deduct TDS at 10% if she does not file proof of her zero tax dues through Form 15G. So to prevent her loss of interest income by TDS deduction, she must file the form 15G before her first interest income is received.
Mr. Raina is 66 years old. His annual income is Rs.2,20,000 and his interest income is Rs. 60,000. What should Mr. Raina Do?
The minimum taxable income limit for Mr. Raina’s age group is Rs.3 lakh. Since his annual income is less than that, it means his taxable income is zero. So he should file Form 15H with his bank to prevent TDS deduction on his interest income which is higher than the exemption limit of Rs.50,000 for senior citizens.
In the above example, what if Mr. Raina’s interest income is Rs. 30,000 from his FD?
Since, his interest income is less than Rs.50,000 exceeding which, the bank comes into the picture and deducts TDS at 10%, Mr. Raina does not have to do anything, given that his annual income is also below minimum taxable income limit.
You must submit Form 15G or Form 15H along with a valid PAN, failing which the TDS would be deducted at 20%.
Form 15G/H has to be submitted to all the bank branches where you are receiving interest income from.
If you have multiple FDs and interest income from even a single branch exceeds Rs.10,000 in a financial year, then you must file Form 15G/H to prevent TDS deduction.
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