A Complete Guide to Recurring Deposit

Recurring Deposit (RD) is a common financial instrument in India since it is low-risk and offers moderate profits guaranteed to be paid out regularly. Customer options for investment quantity and term length are among its many desirable features.

Numerous banks and NBFCs provide this investment vehicle, allowing savers to direct their regular payments toward either a long-term or short-term goal. So, what is the meaning of recurring deposits, and why is it so popular? Let's find out!

What is a Recurring Deposit?

A recurring deposit is a basic monthly saving plan, which helps customers to regulate their savings for higher returns with liquidity.

The key benefits are –

• Regularizes savings by encouraging a saving habit.
• Loan/Overdraft facility up to 95% of the deposit amount.
• Provision for nomination.
• Minimum amount required to open an account Rs 50/-and thereafter in multiple of Rs 50/- (rural and semi-urban).
• Minimum amount required to open an account Rs 100/-and thereafter in multiple of Rs 100/- (Urban and Metro).

These accounts can be funded through Standing Instructions by the customer to the bank where they have a Saving Account or Current Account. The amount is credited to the RD account automatically online or by depositing manually by customer on due date.

RD is a type of term deposit account provided by financial institutions. It's made for those who want to steadily increase their wealth but choose a more conservative approach, such as a fixed income.

Investors must commit to a specific schedule of monthly payments for a set period. The interest payout is set beforehand, and the deposit term and monthly deposit amount are up to the customer based on their budget and financial goals. Interest on regular deposit accounts is compounded once every three months. The depositor can get a lump at maturity because of the account's flexibility, minimal monthly deposits, and low maintenance requirements.

How does a Recurring Deposit Work?

Any person can open an RD if their savings or current account is KYC compliant. 

This account can be opened online or in person. 

The RD account can be of a single holder or a joint account. 

A Recurring Deposit account can be set up in a short amount of time. Anyone with an active current or savings account can start a recurring deposit account. RD means that the depositor authorizes the bank to automatically Debit a set amount from his/her another account on a regular schedule.

Interest on RD accounts is compounded quarterly, and the account holder receives a sizeable surplus of principal and interest upon maturity. In contrast to traditional investment accounts, this allows you to make regular, smaller deposits into your account of choice rather than one large one every few months.

It may not be much, but it will fit into your spending plan. However, early withdrawal is permitted at most banks but is subject to a penalty.

Different Types of Recurring Deposits

• Regular Recurring Deposit Account: Only Indian citizens or permanent residents above 18 are eligible for a regular RD account. Account holders can earn a set interest rate on the principal amount they deposit each month for a set length of time. Depending on the age of the account, interest will be calculated using a compound or a simple interest technique.
• Recurring Deposit Account for Minors: Those under 18 can have accounts opened in their names, but only with parental supervision. When starting the account, you'll choose a fixed monthly payment amount and a specified term, just like with a standard RD.
• Recurring Deposit Account for Senior Citizens: Individuals over 60 can open a specialised RD account at a bank. By the bank's policies, senior persons may be eligible to receive higher interest on their RD accounts than other depositors. The rest of the procedure is the same, regardless of whether the investment period, interest rate, or principal amount changes.
• The NRE/NRO Recurring Deposit Account: Indians who aren't living in the country can use Non-Resident External (NRE) and Non-Resident Ordinary (NRO). The funds from an NRE account can then be used to purchase an RD. The fact that nonresident Indians (NRIs) don't have to pay Indian income tax on their NRE RD deposits is the biggest perk of having one.

How to Open a Recurring Deposit?

Any financial institution or post office should be able to help you to know how to open an RD account and get you started. Be as specific as possible with the terms, including the total amount to be paid, the payment schedule, the duration of the deposit, the nominee, and so on. After that, visit a bank or post office to pay the first month's deposit in cash or via cheque and provide further identification documents such as a PAN card and proof of address. Within the timeframe specified, the bank representative will complete the application procedure.

An RD account can be opened in a bank's branch or over the internet. The steps, in detail, are as follows to fill out an application on the web:

• Access your bank account through a computer or mobile device.
• On the main screen, click "Open an e-RD Account."
• Give the bank account information, the preferred instalment amount, and the desired timeframe for the instalment debit. Include the beneficiary's statement and the interest rate applicable.
• After confirming the maturity date, you can ensure your acceptance of the terms and conditions by clicking the box.
• Send in your application. A receipt for the RD will be emailed to the address on file, and a confirmation message will be shown.
• The predetermined sum will be deducted from the designated account.

Eligibility Criteria for RD Account

The requirements that must be met to open a regular deposit account:

• An individual in his own name.
• More than one individual in joint name.
• Minor of age 10 and above on terms laid down by the bank. Accounts can also be opened in the name of minor with their father/mother, as guardian.
• Clubs, associations, Educational Institutions, Partnerships and joint stock companies, provided they are registered, and bank is satisfied that the account is opened for genuine savings purpose

List of Documents Required for Recurring Deposit Account

• Obtain an application from the financial institution of your choice where you intend to set up your recurring deposits.
• Photos of the applicant in passport size.
• Documentation verifying the applicant's identity and residence is required to set up a regular deposit account such as PAN Card, Aadhar Card, etc.
• If the bank asks for it, you must provide KYC documentation.

Features and Benefits of Recurring Deposit

Recurring Deposits are among the simplest to trade among the many types of financial instruments available. The primary objective of setting up automatic contributions is to help people establish savings habits and build a nest egg for future use.

• Get started with a monthly investment of Rs.100 in a recurring deposit account.
• RD accounts have a six-month minimum deposit period and a ten-year maximum.
• The interest rate on RD accounts is more than what you'd get from a standard savings account.
• The interest is compounded quarterly at most banks.
• Individuals are free to open as many RD accounts as they like.
• Instead of making a large initial payment as you would with a fixed deposit, you can spread out your payments over a year.
• You can avoid having to remember to pay each instalment manually by setting up recurring transfers from your checking or savings accounts.
• The RD balance can be used as collateral for an overdraft or loan.
• Your principal money deposited into a Recurring Deposit will earn interest on a short-term basis. Therefore, putting money into a regular account is a wise financial decision.

How to Calculate RD Interest Rate

How much interest an investor earns varies across different deposits and schemes. Further, if the interest is compounded each quarter, then the effective interest rate increases. To know how to calculate RD interest , investors can use the RD calculator . By entering the deposit amount, interest rate, and tenure, investors can know the amount of interest that they will earn.

Please refer our Bank’s website for calculation of RD maturity amount.

How much is the TDS on Recurring Deposits?

The interest income is taxable at the time of maturity. Banks deduct TDS tax deducted at source on the interest earned on RD investments as per prevailing Income Tax ACT.

How does a Loan against RD Work?

In addition to making loans , banks also offer the option of loan against recurring deposits. The percentage that a bank will lend a customer based on the amount in their regular deposit account ranges from 90% to 95%.

Difference between Recurring Deposit and Fixed Deposit

Refer to the table below to know differences between recurring deposits and fixed deposits :