Want a safe way to save money? Don’t have ready extra cash in a lump sum to invest in a fixed deposit? No problem. There are a multitude of safe saving options available with banks today and a recurring deposit might be the best option for you.
First, what is a Recurring Deposit (RD)? It is a form of a term deposit which allows you to deposit a fixed amount of money on a regular basis and enjoy the same higher interest rate as a fixed deposit. So while you need to put in a lump sum to open a fixed deposit, a recurring deposit allows you to make regular additions to your deposit. An RD helps people who want to save, but do not have a large amount of ready cash to open an FD. Instead, they deposit money in the RD as and when they have cash, on an ongoing basis.
If you want to ‘force save’, you can give your bank a standing instruction to debit your savings account for a fixed amount of money at a fixed time to be credited to your recurring deposit. This way you can make sure that you save every month without the temptation of spending what money you have in your account.
Features of a Recurring Deposit:
Interest rates
The interest rates on recurring deposits can differ with each bank. However, after you open an RD, you will enjoy the same rate for the entire tenure of the deposit. Banks offer competitive rates on RDs and FDs and you need to check the rates being offered by multiple banks. In general, the recurring deposit interest rates are the same as the FD rates and can range from 6%-9% depending on the individual bank.
Remember, senior citizens can enjoy a higher interest rate on RDs.
As of 2015, the interest accrued on an RD is subject to TDS (Tax Deducted at Source).
How to calculate interest earned on an RD
It can be slightly more complicated to calculate interest earned in an RD since the deposit amount keeps increasing periodically with every addition you make. However, it is fairly simple to find online tools that will help you calculate interest. Many banks have an online recurring deposit calculator on their website which helps you calculate the amount you will earn as interest.
Period and amount
Period: The minimum period is typically 6 months, but some banks can insist on a minimum period of 2 years. The maximum period is generally 10 years.
Amount: The minimum amount to be deposited on the periodic basis also depends on the bank.
Withdrawal
Some banks may allow you to make an early full withdrawal of your RD (subject to their terms and conditions) and after paying a penalty fee. In general, banks do not allow partial withdrawal, but will offer it in the form of an overdraft or loan facility, with the balance in the RD being held as collateral.
Loan against deposit
You can also use your RD to take a loan for up to 80-90% of the amount you have deposited. Your balance in the RD will be used by the bank as collateral.
Eligibility
You need to be a resident Indian. Some banks also allow minors to have an RD with a guardian.