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What is a Recurring Deposit? Here’s Everything You Need to Know
Many believe, 'Little drops of water make the mighty ocean,' meaning that consistent efforts in small things can lead to substantial results.
This saying perfectly describes Recurring Deposits, a type of bank account where you invest a fixed amount of money at regular intervals over a specified period. Each deposit you make is like a drop of water that, over time, accumulates into a larger amount (like the vast ocean). This habit of saving regularly, even with modest amounts, can greatly help you achieve your financial goals in the future.
Let's understand this investment tool, exploring the types, features, and benefits of RDs. But first, let’s define “What is a Recurring Deposit?”
A Recurring Deposits is a type of term deposit where customers invest money in regular instalments. Instead of depositing the entire amount at once, RD holders invest a fixed sum at regular intervals for a specified tenure.
Many investors prefer safe instruments that provide a steady income, and Recurring Deposits are popular among these options. The interest rates offered on RDs are comparable to those on Fixed Deposits (FDs) provided by banks. This allows investors to earn significant interest even on modest deposit amounts.
Here are the features of an RD:
RDs act as an excellent investment vehicle for cultivating the habit of regular savings and earning guaranteed returns. They are suitable for both short and long-term financial goals.
The term for Recurring Deposits generally ranges from 6 months to 10 years. Banks mostly ask customers to deposit money in RDs every month, but some financial institutions may also give the option of investing on a quarterly or half-yearly basis. The interest is mainly compounded quarterly and paid on maturity.
Almost everyone can open an RD account in India with any major bank or Non-banking Finance Company (NBFC):
When it comes to saving money, there are several investment options that customers can choose from. However, Recurring deposits are increasingly gaining popularity among investors because of the following benefits they offer:
Besides knowing the benefits of RDs, it's essential to be aware of other considerations related to these accounts.
Now that you understand "What is an RD in a bank?”, let's explore its schemes.
Banks often design special Recurring Deposit schemes with attractive features to suit the needs of various investors. For instance, many banks offer a flexible Recurring Deposit where customers have the option to skip an instalment without paying any penalties, or they may have the opportunity to deposit a different amount to their RD account at each instalment.
There are special RD schemes for minors, the elderly, and Non-Resident Indians (NRIs). Some common types include:
Indian citizens or permanent residents over 18 can open a regular RD account. They can earn a fixed interest rate on the principal amount deposited monthly for a specified period. Interest is calculated using compound or simple interest, depending on the account's duration.
Minors under 18 can have RD accounts opened with parental supervision. Like a regular RD, you select a fixed monthly deposit amount and a specified term when opening the account.
Individuals over 60 can open specialised RD accounts at banks. These accounts often offer higher interest rates (0.50% higher) than regular RD accounts. Other aspects, like the investment period, interest rate, and principal amount, are the same as regular RD accounts.
Non-resident Indians can use Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts to open RD accounts. Funds from an NRE account can be used for this purpose. A key benefit for NRIs is that they do not have to pay Indian income tax on their NRE RD deposits.
Recurring Deposits are a popular investment option in India, offered by most banks and financial institutions. Therefore, the interest rates on RDs are competitive. These rates are typically between 4% and 8% and vary based on current market conditions at the time of account setup.
Recurring Deposit interest rates can differ with the bank, the tenure of your deposit, and your age. For instance, senior citizens often benefit from higher Recurring Deposit interest rates than regular RD schemes.
You can easily calculate your RD returns using an RD calculator. This tool helps you understand the maturity amount you'll receive based on your investment amount, interest rate, and tenure.
Consider these factors before opening your RD Account:
RDs have a fixed period, typically 6 months to 10 years. Choose a period that caters to your financial goals - shorter for immediate needs, longer for goals like retirement or education.
Recurring Deposit interest rates vary by bank, so compare before opening an RD. Use an RD calculator to estimate earnings based on the rate and period. Opt for a bank offering competitive rates for maximum returns.
Many RDs charge a penalty if you withdraw before the term ends. Factor this in, especially if you need access to funds early.
RDs require regular deposits (monthly, quarterly, annually). Choose a frequency that fits your budget - monthly for smaller amounts, quarterly or annually for larger sums.
Interest earned on RDs is taxable. If you're in a higher tax bracket, explore tax-saving options like Equity-Linked Saving Schemes (ELSS) for better returns.
Now that you know what a Recurring Deposit is, along with its features and benefits, you can consider this investment vehicle to build savings. Recurring Deposits are ideal for people who prefer to make investments in smaller instalments. It also inculcates the habit of saving money with discipline. Remember to select a bank offering competitive Recurring Deposit interest rates before investing.
Download DBS Bank app to open a recurring deposit and see your dreams take shape. Also, you can open bank account online with us.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
