What is a Recurring Deposit (RD)? Features, Benefits, Taxation, and How It Works

Discipline is one of the most important aspects of investing and saving money. By investing regularly, you may create an enormous amount of wealth that can feed your different financial goals. These financial goals may include child education, retirement, an emergency fund, or fulfilling personal aspirations such as a dream vacation and purchase of a new gadget.

Despite the availability of various investment and savings products, people find it difficult to save money regularly. This is where a recurring deposit (RD) comes in, allowing you to deposit a fixed amount every month and earn a guaranteed return over a chosen period. Since the interest rate is fixed at the time of opening the account, you can easily estimate the returns of your recurring deposit account.

These attractive features might be raising many questions, such as what a recurring deposit is, how it works, and more. In this article, we will answer all of these questions.

What is a Recurring Deposit?

Offered by banks and post offices, a recurring deposit is a savings scheme that allows you to deposit a fixed amount every month for a fixed tenure. In return, you are eligible to receive a fixed interest amount on your deposits, and you receive the total invested, including accumulated interest, at maturity. Unlike a fixed deposit (FD), where you deposit a lump sum amount at once, a recurring deposit helps you grow your savings gradually via monthly deposits.

Imagine you deposit ₹5,000 monthly for 3 years at 7% in a recurring deposit account. You will receive a total deposit along with interest by the end of the RD tenure.

Due to its predictable returns and disciplined savings nature, RD has become one of the most popular investment instruments among salaried individuals, students, homemakers, and small business owners.

What is a Recurring Deposit Account?

A recurring deposit account is a special deposit account that allows you to deposit a fixed amount every month for a predetermined period. As per the applicable recurring deposit interest rates, the bank or post office credits interest in recurring deposit accounts.

A key difference between the RD account and a savings account is that one cannot withdraw money from an RD account easily without attracting penalty charges until maturity. The restriction on premature withdrawal helps individuals to save regularly and stay invested to reach their financial goals. Most banks offer RD accounts with tenures ranging from 6 months to 10 years.

How Does Recurring Deposit Work?

The working of a recurring deposit is straightforward:

• You choose a monthly deposit amount towards a recurring deposit account.
• Select the investment tenure.
• The bank offers an interest rate applicable on the account opening date.
• You make monthly deposits.
• Interest is calculated and compounded according to the bank’s policy.
• At maturity, you are eligible to receive the total investment along with the accumulated interest.

Let us understand RD with this simple example:

• Monthly Deposit: ₹5,000
• Tenure: 5 Years
• Rate of interest: 7% per annum

On maturity, your deposit may turn like this:

• Invested Amount: ₹3,00,00
• Accumulated Interest: ₹59,667
• Total Value: ₹3,59,667

You can use a recurring deposit calculator to estimate the returns on the deposited amount.

Features of Recurring Deposit

Recurring deposits offer several features that make them suitable for conservative investors. A few of them are mentioned below:

• Fixed Monthly Investment: Every month you deposit a fixed amount throughout the tenure of the recurring deposit. This helps you build a regular savings habit and helps you meet your financial goals.
• Flexible Investment Amount: RD deposit amounts can be very small, thus making recurring deposits accessible to almost everyone. You can decide the monthly amount that suits your budget.
• Flexible Tenure: You can select the investment tenure yourself based on your financial goals. Most banks offer RD tenures ranging from 6 months to 10 years.
• Guaranteed Returns: The recurring deposit interest rate is fixed at the time of opening the RD account and stays the same till maturity. It allows you to receive the guaranteed return that you can easily estimate for future planning.
• Compound Interest: The interest on recurring deposits is compounded periodically, allowing you to earn interest both on your monthly deposits and the interest accumulated. This compounding effect helps your savings grow over time.

Types of Recurring Deposit Account

There are various types of recurring deposit accounts to meet different financial goals offered by different financial institutions.

• Regular Recurring Deposits: Regular recurring deposit schemes are designed for salaried people, self-employed individuals, and anyone who wishes to deposit money at fixed periods of time. These RDs help investors cultivate a savings habit, in addition to earning fixed interest on their investments.
• Senior Citizen RD: Senior Citizens’ RD schemes are specifically meant for those aged 60 years and above. Such RD schemes tend to offer higher interest rates than regular RD schemes.
• NRE/NRO RD: The NRE (Non-Resident External)/NRO (Non-Resident Ordinary) Recurring Deposits are meant for the NRIs (Non-Resident Indians). These help NRIs to save money on a recurring basis in India and earn interest as per the guidelines provided by the banks.
• Post Office Recurring Deposit: The Post Office Recurring Deposit is a government-backed savings scheme that provides safe returns. It is very popular in both rural and urban areas because of its accessibility and security.
• Minor RD Account: Banks and other non-banking financial companies (NBFCs) offer facilities to open minor RD accounts for parents or guardians. This enables parents to make investments on behalf of their children for fulfilling their future needs.

How to Apply for Recurring Deposit?

You can open a recurring deposit account online or offline by following the steps below.

Recurring Deposit Online

Step 1: Log in to your mobile banking app or internet banking.

Step 2: Locate and select the open recurring deposit account option.

Step 3: Enter the monthly deposit, select tenure, and confirm the interest rate.

Step 4: Enable auto debit facility.

Step 5: Submit the request.

Recurring Deposit Offline

Step 1: Visit your bank branch with required documents such as:

• Aadhaar Card
• PAN Card
• Passport-size photo
• Bank details

Step 2: Fill out the RD application form with details such as RD amount, tenure, and nominee details.

Step 3: You can start making deposits after activation of the RD account.

Also Read: What is a Fixed Deposit? Everything You Need to Know Before Investing

Benefits of Recurring Deposits

• Encourages Regular Saving: The RD account involves savings on a monthly basis. This is important as it fosters the habit of saving money. It develops financial discipline to ensure that you save some of your income.
• No Market Risk: RD accounts are immune to the risks associated with market fluctuations, making them a low-risk investment option. This means that your returns remain predictable in this type of investment regardless of changes in the financial market.
• Easy to Open: It is easy to open an RD account, and very little documentation is needed, especially if you have an existing savings account with the bank. Many banks offer the convenience of opening an RD online.
• Suitable for Short-Term Goals: Recurring deposits are perfect for saving for future planned expenditures like education, weddings, vacations, gadgets, or emergency funds. Your regular savings on a monthly basis will allow you to save up the desired amount of money without any hassle.
• Auto-Debit Facility: Many banks provide an auto-debit facility wherein the monthly RD installment gets directly debited from your savings account.
• Loan Facility: Many banks give you the facility to get a loan against your recurring deposit account without closing your account prematurely.

Risks Associated With Recurring Deposit

• Inflation Risk: If the inflation rate is higher than the recurring deposit interest rate. This can impact the purchasing power of the money you receive despite earning interest.
• Fixed Interest Rate Risk: The RD interest rate is fixed at the time of opening an RD account and remains fixed till the end of the period. Even if there is an increase in the rate of interest in the market subsequently, you cannot avail the benefit of the increased interest rate.
• Penalty for Missed Installments: Failure to deposit any installment may attract penalties from the bank. It may also have an impact on the continuity of the RD account.
• Premature Closure Charges: The closure of RD before its maturity date is subject to a penalty, which leads to interest being paid at a lower rate than agreed initially. The maturity amount will consequently be reduced.

Tax Rules for Recurring Deposits

Interest Income Taxable: Interest income received from recurring deposits will be fully taxed under the income tax slab based on "Income from other sources."

TDS Rules: The bank will deduct Tax Deductible at Source (TDS) if your total interest income exceeds the limits in case of all deposits made in that bank.

• ₹40,000 in case of regular taxpayers.
• ₹50,000 in case of senior citizens.

In case the total income does not exceed the taxable limit, you can file Form 15G or 15H to save TDS deduction.

No Tax Deduction: Recurring deposits are not eligible for tax deduction under Section 123/80C of the Income Tax Act.

RD Premature Withdrawal Rule

• Reduced Interest Rate: If an RD account is closed before maturity, banks normally pay lower interest that applies to the entire period. This means that the depositor will receive less interest than anticipated.
• Penalties: Most banks levy a penalty for premature withdrawal, which is deducted from the final value, reducing the total interest earned.
• Bank-Specific Rules: The rules and regulations governing premature withdrawal vary from one bank to another. Therefore, it is necessary to go through the terms and conditions of the bank before opening an RD account.

Also Read: FD vs RD: Which One is Better for Your Financial Goals?

Factors to Consider Before Opening an RD Account

Choosing the right recurring deposit helps you in meeting your financial goals. Hence, it is very important to consider these factors before opening an RD account.

• Compare Interest Rates: Since different banks offer different rates of interest for RD schemes, comparing interest rates can give you an opportunity to invest in an RD scheme that gives you good returns.
• Right Tenure: Select a tenure that suits your financial goals, whether it’s a long-term or short-term goal. Selecting the right duration ensures that your funds are available whenever needed.
• Monthly Budget: Before investing in the RD scheme, it’s important that you consider your monthly budget so that the monthly installments do not put strain on your pockets.
• Premature Withdrawal: Make sure that you know about the premature withdrawal rule before opening an RD account. This will help you understand the applicable penalties and interest implications if you need to withdraw your money before maturity.
• Auto-Debit Facility: Auto-debit facilities provided by several banks allow deduction of the monthly installment directly from the savings account of the investor. This arrangement helps in making payments on time.
• Taxation Rules: Income from recurring deposits is taxable according to the income tax rules. It is necessary to consider taxes while calculating gains from the investment.

FD vs RD: Key Differences

FAQs

What is a recurring deposit?

A recurring deposit is a savings scheme that allows you to deposit a fixed amount every month and earn interest on your deposits until maturity.

How does a recurring deposit work?

You select a monthly deposit amount and tenure, and the bank pays the invested amount along with interest at maturity.

What is the minimum amount required to open a recurring deposit account?

The minimum amount varies from one bank to another, but many banks allow customers to start an RD with a small monthly deposit.

Are recurring deposits safe investments?

Yes, RDs are low-risk investments that provide fixed returns without being affected by market fluctuations.

Are recurring deposit interest earnings taxable?

Yes, the interest earned on an RD is taxable based on your applicable income tax slab.

Can I withdraw money from my recurring deposit before maturity?

Yes, premature withdrawal is allowed by most banks but may involve penalties or reduced interest.

How can I calculate my recurring deposit maturity amount?

You can use a recurring deposit calculator by entering the deposit amount, tenure, and interest rate to estimate returns.

What factors should I consider before opening a recurring deposit account?

Compare interest rates, check withdrawal rules, select a suitable tenure, and ensure the monthly deposit fits your budget.