Banks In India
Indian Nationalized Banks
What is a Recurring Deposit?
You might have heard of Recurring Deposit simply because it is one of the most popular forms of saving in India along with a fixed deposit! So what exactly is a recurring deposit? A Recurring Deposit (RD) is a form of a term deposit which allows you to deposit a fixed amount on a periodic basis with your bank.
The advantage of an RD is that you can enjoy the same higher interest rate as a fixed deposit as compared to a regular savings account. If you get the same interest as a fixed deposit and in an RD, then what is the difference? Well, the difference between an RD and an FD is that a recurring deposit allows you to make ongoing periodic investments in the deposit, whereas in a fixed deposit, you need to deposit the entire lump amount at the time you open the FD account. So for example, if you do not have Rs. 20,000 in cash to invest in an FD, you can put away a small amount, says Rs. 1000 every month into the RD and enjoy a higher interest rate than your regular savings bank account.
An RD is a way to encourage saving among individuals who may not be able to spare a large sum to open an FD, but prefer to invest smaller amounts on an ongoing periodic basis.
You can also deposit the money in an RD with a standing order with your bank so that the deposit is automatic. The bank will deduct the amount you have specified (say, Rs. 1000 every month) and credit it to your RD account. This is a form of automatic saving and ensures that you set aside a fixed amount on a regular basis regardless of your other expenses. On maturity of the RD, you are credited with the entire amount, which includes the principal plus interest.
Features of a Recurring Deposit:
Allows you to deposit money on a continuing basis rather than a one-time payment at opening.
Ideal for people with a regular, stable income who may not be able to spare enough cash to open an FD.
It is for a pre-determined fixed tenure which can range from a few months to several years.
Offers a higher rate of interest than a savings bank account, like an FD, but with a smaller ongoing investment.
Enables regular, ongoing savings.
Allows premature withdrawal in case of necessity.
Is a safe, low-risk form of saving. Popular form of saving in India.
Has relatively low returns when compared to other forms of investment, but is secure.
RD Interest Rates
An RD offers the same higher interest rates as an FD. Some banks even offer marginally higher interest rates on an RD compared to an FD for the same tenure. It is important to keep in mind that the interest rates on recurring deposits differ with each bank. Also, the rates offered on RDs may change at any time.
However, once you open an RD, the rate remains the same for the entire period of the deposit. So if your RD is for 36 months, you will get the same interest rate over the whole 3 year period. In general, the recurring deposit interest rates are the same as the FD rates and in India can typically range from 6%-9%. This is a general range and individual banks may offer a higher or lower interest rate depending on the amount that you invest and the period that you have invested for.
While the interest rate is the same for the period of the recurring deposit, compounding is done on a quarterly basis.
Like FDs, senior citizens can enjoy a higher interest rate on RDs. This could be .25 -.5% higher than the regular RD rate. If you are above 60 years of age and wish to open a Recurring Deposit, check with your bank about the preferential rates offered.
Compare RD interest rates
Before you open an RD, you need to research the interest rates offered by the various banks for the different tenures. It is easy to look up the interest rates on RD on the bank websites to compare which banks are offering the highest interest rates. In general, most banks offer interest rates between 7-8% per annum, with variations depending on the amount and tenure. Some banks, like Bandhan Bank and The Ratnakar Bank, offer interest rates above 8% per annum on RDs. Again, it is important to stress that these rates can change at any time, so it is important to research the latest rates on the bank websites when you plan to open an RD to identify the best RD rates
Recurring Deposit Calculator
An RD Calculator is a handy tool that helps you calculate how much you will earn as interest on your deposit and to determine what the maturity amount will be. It can be slightly more complicated to manually 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 offer an online RD calculator for India on their website which helps you calculate the amount you will earn as interest based on the fixed amount you deposit periodically, the interest rate and the tenure of your RD. Using the RD Calculator will give you an accurate idea of how much interest you will earn and the amount you will receive on maturity which can help you plan your finances accordingly.
If you wish to do it on your own, the formula for calculating interest and maturity amount on a Recurring Deposit is as follows:
M =R [ (1+i)n – 1]
1- (1+i) -1/3
M = Maturity value
R = Monthly installment
n = Number of quarters
i = Rate of interest/400
Duration of an RD
Period and amount
Period: The minimum period for an RD is generally 6 months though some banks can have a minimum period of 2 years. It is best to check with each bank on the minimum period for an RD. The maximum period for a recurring deposit is 10 years.
Most banks require a minimum amount to open an RD. In addition, the amount that you deposit on a periodic basis might need to be of a minimum value, at least for the first few months. This minimum ongoing deposit amount also varies with each bank so it is best to check the required amount before opening the RD.
Many banks will levy a penalty for a missed payment. Some banks may not charge a penalty for missed payments under certain terms and conditions of opening the account. This offers you the flexibility to save only when you can, and at any time you want, instead of having to deposit a fixed amount at a fixed time for the entire tenure of the RD.
When you save in an FD or RD, your money is locked up until the time of maturity. However, sometimes, you might be need cash immediately like for medical expenses or for education expenses. Your RD might be the only source of ready money from your savings. It is possible to withdraw the entire amount of your RD. Do keep in mind that there might be a penalty fee for withdrawing the money and there might be other terms and conditions that need to be followed for withdrawal. The fee may be dependent on the original tenure of the deposit. The shorter the original tenure, the lower the penalty will be. So, the penalty for premature withdrawal of a one year RD will be less than the penalty for withdrawal from a 3 year RD.
Many banks do not offer facility of partial withdrawal of funds from an RD. The option is to withdraw the entire amount of the RD in full. Renewal of RD depends on the individual policies of the bank.
Loan against Recurring Deposit
In some cases, you might need only a relatively small amount of money to tide you over your cash shortfall. You might not want to withdraw the entire amount that is in your RD, only a part of the money. However, banks do not, in general, allow partial withdrawal from the RD. You will need to close the RD and withdraw the entire amount.
If you require only some of the funds that are available in your RD, you can ask the bank about allowing you an overdraft or loan facility, where the balance in your RD is held as collateral. Your loan amount will be calculated based on the amount you have in your RD. Banks can offer up to 75-90% of your balance as the loan amount. The interest rate on the loan is usually a little higher than the RD interest rate.
Any resident Indian can open an RD. Each bank will have its own rules on the minimum opening balance. It is also open to Hindu Undivided Families (HUF), trusts and societies, and private and public limited companies.
Some banks also offer RDs to non-resident Indians (NRIs) but the minimum tenure could be higher.
Some banks also allow minors to have an RD account. This would be under the supervision of a guardian.
When opening the RD, you will need to provide documentation for ID proof ( for instance, PAN card, Voter ID, Driver’s License, Senior Citizen ID, Passport etc.) and address proof ( telephone bill, electricity bill, bank statement with cheque etc.) You need to check with the bank what ID and address proof documentation is valid and can be submitted.
It is also a good idea to avail of the nomination facility on your RD, whether it is singly or jointly held.
With effect from June 2015, interest earned on the recurring deposit will be taxed at source (i.e. subject to TDS). If the interest earned on an RD is more than Rs. 10,000 per annum, it will be subject to 10% TDS.
If the deposit holder does not want the Tax to be deducted at source, the bank may require them to submit Form 15G / 15H (other than company, firm or co-operative society)/ Exemption Certificate under Section 197 (in case of all holders)/ or any other Tax Exemption Certificate. This form or tax exemption certificate has to be submitted every financial year for each recurring deposit held with the bank.
Recurring Deposit FAQs
What is the minimum tenure?
It varies with each bank but generally the minimum tenure is 6 months, followed thereafter by multiples of 3 months up to a maximum of 10 years.
Is there a minimum opening balance and minimum deposit amount?
Yes. The minimum opening balance can be as little as Rs. 10- Rs. 600 depending on which bank, and where you open the RD. The minimum deposit amount can also vary but is usually in multiples of Rs. 100.
How do I open an RD?
You can open an RD online with some banks.
You can call the Customer Care number and ask for details.
You can walk into a branch of the bank you have chosen with the requisite ID and address proof documentation.
What is the interest rate offered on RDs?
In general, many banks in India offer the same interest rates on an RD as an FD (Fixed Deposit). Senior citizens are eligible for a slightly higher interest rate on RDs.
Is there a monthly or quarterly interest pay-out option?
The interest is paid out along with the principal amount at the time of maturity, or when the RD account is closed.
Can I withdraw money from my RD account?
You can withdraw the entire balance in your RD and close your account. Most banks will not allow you to make a partial withdrawal.
What happens if installments are not paid?
If more than a minimum number of consecutive payments are not made, many banks will close the RD account. Some banks offer a more flexible form of an RD on certain terms, whereby you can deposit money any time you like.