Recurring Deposits: Nine reasons why you should consider it

For safe and secure investment, recurring deposits (RD) is one of the best options. In this type of deposit, the person can contribute as low as Rs 100, depending on the bank’s offerings.

But this small amount would remain safe and grow in amount after the stipulated time period. The amount to be paid after maturity is also known beforehand.

In RD, the interest rates are not very high – they usually vary between 3.5% and 6.75% depending upon the tenure and the bank.

Nine important features of recurring deposits:

1. Investing money in RDs is a clever option since the returns are almost guaranteed.

2.  RD is one of the simplest financial products in the world to invest in. Initial investments in recurring deposit also develop good investing habits for the individual.

3. Unlike equity and mutual funds, recurring deposits offer guaranteed returns on the principal amount invested in the short term, mid-term or long term.

4.  The tenure of a recurring deposit account usually varies from 6 months to 10 years. The depositor can select the short-term, medium-term or long-term period for investment according to his/her convenience and needs.

5. The minimum amount to be deposited to open an RD account is only Rs 100 – less than the cost of a cigarette pack – for public sector banks. This amount can be as high as Rs 10,000 per month as per the capacity of the depositor.

6. RD accounts also offer the facility of withdrawal of the account anytime. The bank might charge a small penalty for it, but the money is accessible in any emergency.

7. Banks also provide the facility of loan against recurring deposits. A depositor can avail a loan amount equivalent to maximum 95% of the total money deposited in the recurring deposit account depending on the bank.

8.  Another advantage of RD is flexibility. A flexible recurring deposit is a scheme in which a person can put any amount of money, but the amount should be greater than the minimum amount at any intervals of time.

9. An RD can be opened everywhere – in PSU and private banks, post office and also in small finance banks. Even all leading NBFCs and valid money market company (RBI licensed) offer this savings instruments to its customers.

Tax liabilities

The interest income will be counted as a part of the yearly income of the investor. A TDS of 10% is deducted on the interest one earns from recurring deposits in a year.

The TDS is not deducted if the interest earning is less than Rs 10,000. The TDS will be 20%, if anyone fails to provide the PAN details to the bank.

If the income falls under the non-taxable income slab, the person still has to submit the form 15G (or 15H) to be taxed for both fixed and recurring deposits.

Expert take

Investment planners feel that RD is a basic investment instrument and one can start one even with his/her pocket money. This helps inculcate a habit of saving.

If an individual needs to withdraw after a couple of years, one should go with a bank. Else, one can also open one with a post office.

“One of the main disadvantages of recurring deposits is that it is not tax efficient. Interest income from RD is added to income for declaring tax liability and TDS is applicable on interest earned from a RD. Besides the returns are low as is the risk,” said Nilotpal Banerjee, an investment planner based in Kolkata.

However, for people willing to invest a fixed and small amount every month, opening an RD still is certainly an option, added Banerjee.