Role of recurring deposit in your investment journey

Regular yet small investments always build a neat corpus if allowed sufficient time. While SIP in a mutual fund does not guarantee a fixed return and is not appropriate for those valuing safety of funds above everything else, a recurring deposit (RD) gives a guaranteed return. One can have multiple RD investments either in banks or in post offices. If you are planning to invest for you or for your child’s future RD is an appropriate instrument. You can start investing in a bank RD with Rs 500 and with only Rs 100 in a post office. Generally, an RD comes with tenures between six months and 10 years. An individual can open RDs both in a bank and a post office simultaneously.

Tenure

Tenure of recurring deposit varies between six months and 10 years for banks and between five years and 10 years for post office. One can choose the tenure according to his financial planning.

Interest rates

Public sector banks and private banks offer different rates and they depend on the tenures of deposits. One-year bank RD generally comes with 4.5%-5% interest rate and it goes up to 5.5%. Some private banks even offer up to 7% interest on RDs.

On the other hand, in post office one will get 5.8% interest on RD.

Premature withdrawal

Both banks and post offices have the facility of premature withdrawal but subject to paying a penalty. Generally, if you go for an RD of more than six months tenure, you may withdraw the amount after completion of six months or above. But one must know the rule for premature withdrawal.

Investment

One can start an RD with as low as Rs 100 per month in a post office. Thereafter the amount can go in multiples of Rs 10. On the other hand, in a bank one can start a RD with Rs 500 and the amount can go up in multiples of Rs 100 or Rs 500, depending upon the bank.

Tax benefits

Tax may be deducted at source if the interest income earned on recurring deposits across all branches exceeds Rs 40,000 per financial year. The limit for senior citizens is Rs 50,000 per financial year. This rule is the same in both banks and post offices.

Payout

In RDs, the maturity amount is usually paid after the investment tenure is completed. No interim payment is made during the tenure except premature withdrawal.

Eligibility

Any person can open an RD, if he/she has a bank account. A minor can also invest in recurring deposit. And there is no restriction on opening the number of RD accounts.

Expert take

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

“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 in Kolkata.