Recurring deposits – Start now to Gain from High Interest Rates?

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If you are looking for investing your money in debt instruments, it’s the right time to do so. RBI (Reserve Bank of India) on March 9, 2012 has reduced CRR rates by 0.75%. This means banks would have more money to lend and so loan rates are expected to go down and so are fixed deposit rates.

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To benefit from this high interest rate, you can lock in your lump sum money in Fixed deposits. But if you don’t have a lump sum and still want to take the advantage of high prevailing interest rates – Recurring Deposit (RD) is the solution.

What is Recurring Deposit?

Recurring deposits are similar to systematic investment plans and fixed deposits. You make a fixed investment every month, which earns a certain rate of interest. At the end of the tenure, you get a lump sum, which is equal to the total amount invested, along with the interest earned on it.

Recurring Deposit – the Details:

Recurring deposit can be opened both with banks and your local post office. The minimum investment is Rs 100 at most banks, while post offices accept even an initial amount of Rs 10. Some banks have an upper limit of Rs 15 lakh and the tenure varies from six months to 10 years. Senior citizens are eligible for a higher rate of interest, usually 0.5% more than that for other investors.

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Typically, a bank insists that you open a savings account with it before opting for a recurring deposit. This is because your monthly installments will be routed through this account.

Interest Rate for Recurring deposit:

The interest rates for both Recurring Deposit and Fixed deposit is similar. Below is the list of best Recurring deposit schemes available for different tenures.

Tenure Bank Interest Rates Maturity Amount *
1 Year Indian Overseas bank 9.50% 63,156
2 Years Punjab & Sind bank 9.75% 132,877
3 Years Punjab & Sind bank 9.60% 209,060
5 Years IDBI Bank 9.50% 384,376
10 Years IDBI Bank 9.50% 999,036

* Maturity Value is calculated as the sum you would get after the specified tenure at the given interest rates, if you invest Rs. 5,000 every month

Who can open a Recurring Deposit?

Anyone can open a recurring deposit with a bank or post office, including a Hindu Undivided Family (HUF).

NRIs cannot open a recurring deposit in a post office but they can set up an account under their NRE accounts with banks or other financial institutions.

Click for Best Interest Rate on Tax Saving FDs

Words of Caution:

Commit a monthly installment you can pay comfortably, as missing of an installment may lead to a default, which could result in a penalty. The penalty will depend on the monthly installment and the number of days by which you have delayed the payment. It will be deducted from the interest that has been accrued on the deposit till then. If you default frequently, your account could even be shut down.

Each bank has its own policy on dealing with defaulters. For instance, if you default for five consecutive months, HDFC Bank will send you a notice, and if you fail to pay for the sixth month too, the bank will shut down your account. The post office excuses a defaulter four times and also extends the payment period to two months, after which it will axe the account. DCB Bank does not charge a penalty, but it will consider an account inactive if you do not deposit any money for two years. A holder of such an account will be sent a notice, after which the bank may take a call on closing it.

You cannot opt for partial installments. For instance, if you pay Rs 2,000 a month, you cannot break this up in two installments of Rs 1,000 each. Also, you cannot pay more than the fixed amount every month.  Even if a bank allows you to deposit more, you will not earn any interest on the additional amount.  Another drawback is that once the tenure is fixed, you cannot change it.

Premature withdrawal of Recurring deposits:

If you are in an urgent need of money midway, banks allow premature withdrawal of the RD. You can withdraw it prematurely after one year in case of the post office and three years for most banks. However, you might lose out on the interest by 1-1.5 per cent. A better option would be to take a loan or an overdraft against the balance of your RD. While Canara Bank offers loan against the RD balance, State Bank of India (SBI), gives both loan or overdraft against a recurring deposit, which could be up to 90 per cent of the RD balance. It’s a win-win option for you as, first, your RD keeps earning interest at the original rate and, second, you get a loan or an overdraft at a lower rate compared to other options, such as a personal loan.

Tax implications of Recurring deposits:

Unlike fixed deposits, where banks deduct TDS (tax deducted on source) on the interest earned, there is no such deduction in the case of an RD. The tax liability rests with the depositor on his overall annual income through all sources. In case of minors who have a joint account with their parents, the interest accrued will be clubbed with the income of the parent whose total income is higher.

Does Recurring Deposit suit all?

For people with fluctuating income patterns, an RD may not be the ideal product. As stated above in an RD, if you miss a payment, you have to pay a penalty. If you have an irregular income pattern, you may take a look at the bank sweep-out account, under which whenever you have surpluses above a prescribed level, the bank automatically books an FD of the surplus amount.

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21 thoughts on “Recurring deposits – Start now to Gain from High Interest Rates?

  1. R. D. is better or infrasructure bonds or Advantage of woman financialy ? how?

    • @ Priyaketu
      I am sorry but I didn’t get your question. If you want to compare if RD with infrastructure bond – its like comparing apples with oranges. Infra bonds are purely meant to be for tax saving while R.D is meant for disciplined debt investment for long term. So it depends on your needs.

  2. What is the Recurring Deposits offered by HDFC Bank?

  3. I would like to go for a recurring deposit in any of the reputed banks. Please provide me the interest rate slabs and also advise me which bank will be more benefit to me.

  4. […] is speculation that RBI would decrease interest rates going forward. Its a good idea to lock your investment in high interest rate by using Recurring Deposit (RD). Below are the features, interest rates, maturity amount along with other details for SBI Recurring […]

  5. SHEETAL MEHTA says:

    FOR EXAMPLE, IF I OPEN A RD A/C AND DEPOSIT EVERY MONTH RS. 1000/= FOR 12 MONTHS. THEN AT THE END OF THE YEAR, WHAT WILL BE THE TOTAL AMOUNT INCLUDING INTEREST WILL BE CREDITED IN MY SAVINGS A/C ?

    BY THE WAY WHAT IS THE RATE OF INTEREST FOR A RD A/C OPENED FOR 1 YEAR ?

    WAITING FOR YOUR IMMEDIATE REPLY.

  6. […] In case you don’t have the bulk amount but still want to lock your future investment at higher interest rate – recurring deposit with banks is a great idea. You can read the details of recurring deposit here. […]

  7. Is it tax exempted..???? I mean if I deposit a certain amount in RD account per month, then will it come under the savings of 1 lac, that we can make under one financial year..?? Kindly Rep

    • No its not tax exempted. In case of RD banks don’t deduct TDS. But on RD maturity its your responsibility to add interest received to your income and pay taxes accordingly.

  8. Please put some details for IWish RD from ICICI Bank…

    I think it’s a unique type of RD and it’s beneficail to..for younger generation..

  9. What are the penalty charges for bank of Baroda , defaulting last two months of a one year recurring deposit?

    • I am not sure as its not mentioned on bank of Baroda’s site. You can call them and ask for it. I request readers to answer this in case they are aware!

  10. BANSHI LAL says:

    R D IS VERY GOOD SAVING PLAN

  11. […] Fixed Deposits are not totally risk free. There is reinvestment risk. As you can see the fixed deposit rates have gone down to the extent of 4% in 2002. So you should lock your investment in fixed deposits when you are getting good returns. Right now its good time to lock in long term fixed deposits. […]

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