Recurring Deposit
Introduction:
Recurring Deposit (RD) stands out as a favored choice among low-risk investment avenues in India, offering moderate and guaranteed returns. It grants customers the flexibility to determine their investment amount and tenure, complemented by various advantages.
Featuring flexible tenure options spanning from 6 months to 10 years, this investment instrument, available through numerous banks and NBFCs, facilitates the systematic accumulation of monthly savings for both short and long-term financial objectives.
By committing to a minimum monthly investment over the chosen term, investors can ensure steady wealth accumulation, even without a lump sum to fulfill immediate goals. Depositing a portion of one's income into the RD account each month proves to be an effective strategy for meeting short-term aspirations.
Features of Recurring Deposit
Recurring Deposit (RD) ensures a fixed interest rate on the invested sum, disbursed at regular intervals until the predetermined tenure expires or upon reaching maturity. Upon maturity, the invested capital along with the accrued interest is returned to the investor.
Key Features of Recurring Deposit:
Cultivating a Savings Culture: RD schemes foster a culture of savings within the community.
Flexible Minimum Deposits: The minimum deposit amount varies across different banks, sometimes as low as Rs. 10.
Tenure Range: RDs typically have a minimum deposit period of six months and a maximum of ten years.
Competitive Interest Rates: RDs offer interest rates comparable to those of fixed deposits, often surpassing rates offered by other savings schemes.
Withdrawal Policies: While certain banks and NBFCs prohibit premature or mid-term withdrawals, others allow them with penalties.
Loan Facilities: RDs provide the option to avail loans against the deposited amount, usually ranging from 80% to 90% of the deposit value, varying among lenders.
Standing Instructions: RD contributions can be conveniently funded through Standing Instructions, allowing customers to instruct the bank to credit their RD account monthly from their Current or Savings Account.
Recurring Deposit Interest Rates - 2024
Banks
3.0% - 7.25%
7.45% - 7.75%
Eligibility for a Recurring Deposit
Key Considerations Before Applying for a Recurring Deposit:
1.) Term Period Options:
Recurring deposit term periods typically fall into three categories: Short-Term (6 months to 1 year), Medium-Term (more than 1 year to 5 years), and Long-Term (more than 5 years to 10 years). It's essential to assess the term period options before initiating an RD.
2.)Interest Rate Variations:
Before opening an RD account, it's prudent to examine the interest rates offered by different banks. Interest rates can vary based on the term periods provided by each bank.
3.) Premature Withdrawal Terms:
While most banks permit RD account openings, they also facilitate premature withdrawal options. In the event of early withdrawal, the payable interest is calculated based on the completed tenure, accompanied by a penalty charge imposed by the bank. Hence, it's advisable to select a bank offering competitive interest rates with minimal penalty charges for premature withdrawal.
Opening an Recurring Deposit Account
Opening an RD Account: Online Method
Access your net banking account or app.
Select the option 'Open an e-RD account.'
Input the designated account number for installment debits, installment amount, duration, and review the applicable interest rate. Also, indicate the nominee for the account funds.
Confirm your agreement to the terms and conditions by checking the designated checkbox after reviewing the maturity amount.
Submit your application. Upon confirmation, a message will appear, and an RD receipt will be dispatched to your registered email address.
The specified amount will be debited accordingly.
Opening an RD Account: Offline Method
Visit the nearest branch of your bank where you hold a savings account.
Complete the RD application form, providing details such as installment amount, payment mode, deposit tenure, nominee information, and other relevant particulars.
Initiate the first installment payment via check or cash.
Your application will undergo processing within the bank's stipulated timeframe.
Varieties of Recurring Deposits
Benefits of RD Investment
Opting to invest in an RD is a wise financial decision, given its nearly guaranteed returns on the principal amount and attractive interest rates. Here are some additional benefits of RD investments:
Simplified Investment Product:
RD stands out as one of the most straightforward financial instruments globally. Its investment concept is straightforward, making it an ideal choice for individuals new to financial investments. Initial forays into recurring deposits also foster disciplined investing habits.
Assured Returns:
Unlike equity and mutual funds, RDs provide assured returns on the principal amount within the short term.
Flexible Tenure and Minimum Deposit:
RD tenure typically spans from 6 months to 10 years, offering investors the flexibility to choose between short, medium, or long-term investments. Opening an RD account requires a minimum deposit, which varies across institutions. Public sector banks typically set it at Rs. 100, while private sector banks like ICICI or HDFC may require Rs. 500 to Rs. 1,000 initially.
Anytime Withdrawal:
RD accounts permit withdrawals at any time, albeit subject to a nominal fee imposed by the bank. This flexibility proves advantageous for depositors requiring urgent access to their funds and accrued returns.
Loan Facility:
Banks extend the option of availing loans against RD deposits, typically offering loan amounts equivalent to 90-95% of the total RD deposit, contingent upon the bank's policies.
Flexible RD Schemes:
Flexible RD schemes empower investors to deposit varying amounts (greater than the minimum stipulated) at their preferred intervals. Some banks even allow the option to skip installments without incurring penalties.
Renewals & Withdrawals of an RD
In the event of early closure of an RD for reinvestment in a term deposit, the account holder will receive interest without a reduction in the interest rate, subject to a 1% penalty.
This condition applies if the reinvested deposit remains with the bank for a duration longer than the remaining tenure of the initial deposit.
However, should the account holder opt to withdraw funds from the deposit before maturity, the earned interest rate will be based on the duration the funds remained with the bank, with a 1% penalty for early withdrawal.
If withdrawal occurs before maturity following reinvestment, a 1% penalty is imposed from the original contract date to the premature withdrawal date post-reinvestment.
Penalties are applied from the reinvestment date to the premature withdrawal date post-reinvestment if withdrawal occurs after the maturity due date of the deposit. Renewal and withdrawal policies for RDs vary among banks.
1.) Credit Score:
In the case of premature withdrawal from an RD, the interest rate applicable will correspond to the duration the deposit remained with the bank, with a 1% penalty levied by the bank. Interest rates offered vary according to individual bank regulations.
While some banks may reduce interest rates by 1% to 2% for the period of the deposit's tenure with the bank in the event of premature withdrawal, the minimum lock-in period for an RD account typically spans three months.
Withdrawal before this period results in zero interest earned, with only the principal amount refunded.
Furthermore, depositors forfeit incentives offered by the bank on the RD, in addition to interest penalties, in the event of premature withdrawal.
Partial Withdrawal of an RD:
2.) Most banks do not permit partial withdrawals from RDs. However, some offer alternatives such as loans or overdraft facilities secured by pledging the RD balance as collateral.
Premature withdrawal is allowed with a 1% penalty based on the duration the deposit remained with the bank. While some banks may impose penal interest rates (1-2%), others offer the option of partial withdrawal if the RD is held with a post office for at least one year, treating the withdrawn amount as a loan repayable in a lump sum.
For premature closures within a month, RD accounts do not accrue interest, with only the principal amount refunded.
Tax-Saving Recurring Deposit
The interest accrued by RD account holders is subject to taxation. The Tax Deducted at Source (TDS) amount is contingent upon the depositor's annual income. The following are the three income brackets and the corresponding applicable TDS rates:
For Annual Income Below Rs. 2.5 lakh:
If an individual earns less than Rs. 2.5 lakh annually, a TDS of 10% applies to the interest earned on the RD account if it exceeds Rs. 10,000. To exempt the interest from taxation, depositors can claim a TDS refund by submitting Form 15G to the income tax department.
For Annual Income Between Rs. 2.5 lakh and Rs. 5 Lakh:
Individuals with annual incomes ranging from Rs. 2.5 lakh to Rs. 5 lakh are subject to a 10% TDS on the total interest income earned from the RD account, provided it surpasses Rs. 10,000.
For Annual Income Between Rs. 5 Lakh and Rs. 10 Lakh:
Depositors earning between Rs. 5 lakh and Rs. 10 lakh annually face a 10% TDS on the RD account's total interest income exceeding Rs. 10,000. Additionally, they are liable to pay 20% income tax on their total income. Despite the bank deducting only 10% TDS, individuals must pay tax at a rate of 10.3% when filing their Income Tax Returns (ITR).
For Annual Income Above Rs. 10 Lakh:
Individuals earning over Rs. 10 lakh annually encounter a 10% TDS on the RD account's total interest income exceeding Rs. 10,000. Furthermore, those earning between Rs. 5 lakh and Rs. 10 lakh are subject to a 30% income tax rate on their total income. Although the bank deducts only 10% TDS, individuals must pay tax at a rate of 20.6% when filing their ITR.
Closing an Recurring Deposit Account:
To terminate an RD account, you can utilize one of the following methods, depending on your bank:
Offline - Visit your bank branch and submit a closure request for your RD account.
Net Banking - Access your bank's net banking platform and follow the necessary steps to close your RD account.
Mobile Banking - Utilize your bank's mobile application to log in and proceed with the steps to close your RD account.
In each of the scenarios outlined above, the closure proceeds will be credited to the same savings bank account from which the recurring deposit payments were being deducted.
1.) How can I close my RD account?
You can close your RD account either by visiting your bank branch, using net banking, or through the bank's mobile application.
2.) Where will the closure proceeds be deposited?
The closure proceeds will be credited to the same savings bank account from which the recurring deposit payments were deducted.
3.) Is it necessary to visit the bank branch to close the RD account?
No, you can also close your RD account using net banking or the bank's mobile application.
4.) Can I close my RD account online?
Yes, you can close your RD account online through net banking or the bank's mobile application.
5.) Will I receive the closure proceeds immediately?
The closure proceeds will be deposited into your savings account, usually within a few business days after the closure request is processed.
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