What are the Benefits of Recurring Deposits
03 Jul 2019
There are many benefits of recurring deposit.
Most banks have a very low amount of monthly installment. Some banks even have recurring deposit schemes where the installment frequency is quarterly or half yearly. This ensures people with low amount of savings can also invest in such schemes.
Goal based saving
One of the best benefits of recurring deposit is that it helps with goal based savings. Regular monthly installments earn interest and work towards building a corpus for the short term. Installments can be planned so that a required corpus is built up for use in the future. To check the maturity amount for a given installment amount, you can use a recurring deposit interest calculator which is available for free on major bank websites. By using this calculator, you can plan your finances so that your monthly investments build up to the amount you need.
High rate of interest
Recurring deposits earn the same rate of interest as fixed deposits. Thus, these can be used effectively as a tool to earn income. Interest is compounded quarterly on the investments made which helps the investor to earn on interest as well as the principal. Senior citizens can get a higher rate of interest on their recurring deposits.
Saving for minors
Most banks allow recurring deposits to be opened by minors with a joint holding by the parent or the legal guardian. This helps to build investments for the minor’s use.
A recurring deposit is an excellent way of ensuring disciplined investing. Since the installment amount for a recurring deposit has to be paid on the same day every month, the investor is forced to put aside that amount. It inculcates discipline and a savings habit to the extent of the installment amount.
Most banks offer a loan facility on the recurring deposit amount. This loan is given up to 95% of the recurring deposit amount. This can be resorted to in case of any emergency.
Easy to open
Opening a recurring deposit is extremely simple. You do not need to have a savings bank account in that particular bank to open a recurring deposit account. Opening a recurring deposit account can be done online via net banking of the particular bank. In case it is not possible to open it online, you can visit the bank branch, fill up the recurring deposit form and submit the required documents along with a cheque for the installment amount.
The recurring deposit benefits to tax are available when it comes to TDS. Banks deduct tax on the recurring deposit interest only when it exceeds Rs. 10,000 in a particular year. If the total interest amount does not exceed Rs. 10,000, then they do not deduct tax. Also, no tax is deducted if the depositor submits Form 15G/15H certifying that their income is below the no tax limit.
Recurring deposits come with a nomination facility. This means the recurring deposit amount will be paid to the nominee in case of death of the deposit holder. Setting up nomination for a recurring deposit is very simple. This detail can be provided while opening the recurring deposit account.
Deduction on interest earned
While the interest earned on a recurring deposit is chargeable to tax, interest earned up to Rs. 50,000 is deductible under Section 80TTB of the Income Tax Act for senior citizens. This provision ensures a higher amount of income remains in their hands.
A recurring deposit is an excellent investment option for people who have small savings and want to build up a corpus for specific goals
Top 5 tax saving investment options
Paying taxes is a legal, ethical duty that every individual has to fulfil. The government uses your tax money towards the development and progress of the country. The government even offers some tax relief if one invests in certain instruments. However, most people tend not to follow a disciplined approach with regards to tax savings and investments. Either they begin investing towards the end of the financial year or they choose their investments to avail tax savings benefits. Both these methods of tax saving are wrong. The smart thing to do is to begin investing in the early months of the financial year. You can choose from the top 5 tax saving investment options to avail maximum benefits.
ELSS mutual funds
Specially designed for tax savings, Equity Linked Saving Scheme or ELSS mutual funds are considered one of the best tax saving investments. ELSS funds are market-linked products, which, though regarded as high-risk products, also offer higher returns. ELSS funds allow you to save taxes under Section 80C of the Income Tax Act of 1961. Also, ELSS funds are equity-linked products that come with a short lock-in period of 3 years. Moreover, ELSS investments can also be made through SIP or systematic investment plans, which allows you to spend a small, fixed, monthly amount as opposed to a lump-sum amount at one time.
Public Provident Fund
A favourite of the conservative investor, the PPF refers to the government issued, long-term savings scheme. Launched in 1968, the PPF tax saving scheme allows the investor to earn tax-free returns. Currently, you can earn 7.6% interest per annum on your PPF savings, and is especially beneficial for individuals of high-income slabs, paying 30.9% tax. Such individuals can earn taxable returns of approximately 11.04%. However, it is mandatory for one to deposit at least a minimum amount of ₹500 per annum, whereas the maximum savings per annum cannot exceed ₹1.5 lakhs. Also, the PPF scheme lasts for a minimum period of 15 years, and partial withdrawals can only be made after the 8th year of investment.
Unit Linked Insurance Plans
Regarded as hybrid products that provide both, protection and savings, Unit Linked Insurance Plans or ULIPs are regarded as great tax saving schemes, because they provide the investor with the much-needed life insurance policy, while also helping him invest in different market-linked assets, which help him meet his long-term goals. Most ULIPs come with 5 to 9 fund options, with variable asset allocation between equity and debt. While the duration of ULIPs is approximately 15-20 years, there is a minimum lock-in period of 5 years. Also, the fund value of an ongoing/matured policy is tax-free.
National Pension Scheme
One of the few tax savings schemes, which allow the investor to surpass the maximum ₹1 lakh limit of deduction, as set by Section 80C of the Income Tax Act; the National Pension Scheme or NPS is also ideal for tax saving investments. Under this scheme, the percentage of the investor’s basic salary (not exceeding 10%), as contributed by the employer towards the national pension scheme, is tax deductible. That said, the investor’s contribution towards NPS is still governed under Section 80 C, which allows you to surpass the ₹1 lakh limit.
Health insurance investments
Although not traditionally regarded as an investment for tax saving purposes, health insurance plans offer coverage that adds more value than any other form of investment. Apart from providing you security against unpredictable health scares, you also earn a tax deduction on health insurance plans, making them one of the best tax saving investments. One can avail a tax deduction of up to ₹15,000 on health insurance plans, where the upper limit on tax deduction for senior citizens is ₹20,000.
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What is a Recurring Deposit Account & How to open this Account
Features of recurring deposit account:
A recurring deposit account can be opened for as less as Rs. 100 depending on the bank.
The installment in most recurring deposit accounts is fixed and has to be deposited on the same day every month. Some schemes allow quarterly or half yearly installments.
All the recurring deposit installments mature on the same day.
The tenure for a recurring deposit is flexible and depends on the depositor. Banks may have a minimum tenure for an RD, but the ultimate tenure fixed depends on the depositor and his need for funds.
The rate of interest for recurring deposits is around the same rate as a fixed deposit account.
No tax is deducted on the interest earned on a recurring deposit account if the amount of interest does not exceed Rs. 10,000. A depositor can submit Form 15G/15H for exemption from tax deduction. Form 15G/15H states that the depositor’s income is below the no tax limit and the bank should not deduct tax on the interest earned.
The depositor can avail a loan against the recurring deposit up to 95% of the recurring deposit amount.
The interest earned on a recurring deposit amount is added to the taxable income of the depositor.
How to open recurring deposit account in bank:
Opening a recurring deposit account is an extremely simple process. To make it easy for all types of depositors, banks have made it possible to open an RD account online and offline.
How to open RD account online:
It is very convenient to open an RD account online via net banking. Before opening an RD account, it is important to check the rate of interest for different tenures. Many banks also have a recurring deposit interest calculator where you can check the final maturity amount and the interest on the deposit.
To open RD account, you need to log in to net banking. Depending on the bank, the net banking structure will be different. You need to select the option to open a new recurring deposit account. Once you select that, you need to decide the installment amount and the tenure. You will also need to select the account to link to your RD account i.e. current account or savings account.
One important thing to remember is to specifically choose ‘Senior citizen’ option if you are eligible. Most banks give a higher rate of interest to senior citizens.
The next important point to remember is the maturity instructions. Depending on whether you immediately need the funds or not, you can opt for a maturity of the entire principal and interest amount, or convert the entire amount to an FD. You also have the option of converting the principal amount only into an FD. If you decide to convert it into an FD, then you need to decide the tenure for the FD as well.
The last detail you need to take care of is the nomination details. It is recommended to set up a nomination for your investment especially if you have an account under a single name.
Once these details are entered, you need to submit it and the bank debits your account. Once the account is debited, the RD gets created.
How to open RD account offline:
Opening an RD account offline is also very simple. All you need to do is go to the bank branch and fill up a form for opening a recurring deposit account. You need to fill up the required details and submit it to the bank along with a cheque for the installment amount. If you are a customer of the bank then you need to put in your bank account details along with other details such as maturity instructions and nomination details.
If you are opening an RD account in a bank in which you do not have an account, then you will have to provide your KYC documents along with the account opening form and other details. You will need to decide the RD tenure, the installment amount, the nomination details and the maturity amount. You will need to either give standing instructions to your bank for a periodic debit to the bank account or personally deposit money in your RD account to ensure the installments are met. If you want to get an exemption from TDS on your interest, be sure to submit Form 15G/15H.
Once the RD is processed and opened, the bank will provide an RD certificate bearing all the details.