Recurring Deposit- Features & Benefits

By: Bank of Baroda
Wed Jul 3, 2019
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The best way to grow your corpus and begin investing is to put money into an investment regularly. Investments that call for regular installments not only help to build up savings, but they also enforce discipline among the investors. One of the most popular investments that meets the description above is a recurring deposit or RD. Read this handy guide to know what is the meaning of recurring deposit account and what are RD account benefits.

What is a recurring deposit account?

A recurring deposit is a type of deposit in which there are fixed installments that have to be invested in an account at fixed intervals of time for a pre-decided period. Since the installments recur or fall due at regular intervals, it is called a recurring deposit. That is the recurring deposit meaning.

Different banks may specify different installment frequencies i.e monthly, quarterly, or half yearly. The most popular option offered by most banks is the monthly installment system. In this, the depositor has to pay a pre-decided amount into the recurring deposit account every month. The investor can decide the installment amount subject to the minimum rules set by the bank. It is even possible to open a recurring deposit account with an installment as low as Rs. 100.

What is the recurring deposit scheme?

Let us understand what is meant by recurring deposit

  • The depositor has the flexibility to choose his tenure for the recurring deposit. The bank may have special schemes going on where you have to deposit a certain installment for a particular tenure. The depositor however can decide how long he wants to invest. The standard minimum tenure is 6 months and the maximum tenure goes up to 10 years
  • All the recurring deposits mature on the same day.
  • The installments are due to be deposited or credited into the recurring deposit account on the same day every month, quarter, or half year as applicable.
  • Usually the rate of interest offered on recurring deposits is similar to the fixed deposit rates offered for the same tenure by banks.
  • Premature withdrawals from a recurring deposit are generally not allowed unless the bank charges a penalty in terms of interest rate. The rate of interest on a premature withdrawal is less than the actual rate and that is the penalty

What is the benefit of recurring deposit?

A recurring deposit account is an excellent investment option, especially for those who may not have a large amount to invest. There are several benefits of investing into a recurring deposit account

  • Goal based saving: One of the best advantages of a recurring deposit is that it can be used as a tool for goal based savings. Using a recurring deposit calculator, you can find out exactly what the total maturity amount is. This is especially useful for short term fund requirements, such as education expenses or saving for a wedding or travel expenses. A recurring deposit can help you grow your savings in a very systematic manner.
  • Loan against RD: While it is not allowed to withdraw funds from a recurring deposit before maturity, it is possible to take a loan against the balance in a recurring deposit. Most banks give out loans against 90% of the recurring deposit balance.
  • Saving for Minors: Banks allow parents and legal guardians to open a recurring deposit account for minors. This can be used as an effective way to save for the child’s education expenses. The recurring deposit can mature just before the child’s school year is set to begin, thus meeting the need for school fees.
  • Tax break for senior citizens: Under Section 80TTB of the Income Tax Act, senior citizens get a deduction of Rs. 50,000 for interest earned. This includes interest on fixed deposit, recurring deposit, savings account and any other type of interest. This makes a recurring deposit account that much more attractive to invest in since the interest will get a deduction.
  • TDS relief: Banks do not deduct tax on recurring deposit interest unless the total interest on all deposits crosses Rs. 10,000 in a particular financial year. However, by submitting Form 15G/15H, a depositor can get relief from TDS provisions.

We understood what is a recurring deposit account and what is the use of a recurring deposit. With this information, you can decide whether a recurring deposit is the right investment for you.

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