If you want to invest in small amounts that fits in your budget and on a regular basis, RD's may be a reasonable option. The deposited amount earns interest according to the applicable rate offered by the bank or financial institution. Unlike a lump-sum deposit, an RD involves multiple instalments during the tenure. The account terms, interest rate, minimum instalment, tenure, and premature withdrawal rules may differ across institutions. Understanding these features may help individuals understand how an RD operates and how its interest and taxation are treated.
What is a Recurring Deposit?
A recurring deposit is a deposit account where a fixed amount is deposited at regular intervals for a specified tenure. The amount deposited earns interest as per the applicable rate.
The depositor generally makes monthly instalments until the end of the selected tenure. On maturity, the accumulated deposits and applicable interest are paid according to the account terms.
How Does a Recurring Deposit Work?
The following steps explain how a recurring deposit works.
1. Select the deposit amount:
The depositor chooses the amount to be deposited every month.
2. Select the tenure:
The depositor selects the tenure offered by the bank or financial institution.
3. Make regular instalments:
The selected amount is deposited every month until the tenure ends.
4. Interest calculation:
Interest is calculated on each monthly instalment based on the applicable interest rate and compounding frequency.
5. Maturity:
The accumulated deposits and applicable interest are paid on maturity.
For example, if a depositor places ₹5,000 every month for 12 months, the total amount deposited would be ₹60,000. Interest would be calculated according to the applicable RD rate and deposit terms.
The exact maturity amount may differ across institutions because interest rates, compounding frequency, and account terms may vary.
How is RD Interest Calculated?
RD interest is calculated on the instalments deposited during the tenure. Since each instalment remains deposited for a different period, the interest earned on each instalment may differ.
A simplified compound interest formula can be represented as:
A = P × (1 + r/n)^(nt)
Where:
- A = maturity value of a particular deposit
- P = principal amount
- r = annual interest rate
- n = number of compounding periods in a year
- t = investment period in years
For example, if ₹5,000 is deposited every month for 12 months at an annual interest rate of 7%, compounded annually. The total principal deposited is ₹60,000. The maturity amount will be ₹62,873 because each instalment earns interest for the period it remains in the RD.
Banks may use specific RD calculation methods based on their product terms. The maturity amount shown by the respective institution may therefore differ from a simplified calculation.
Key Features of Recurring Deposits
The following are some common recurring deposit features.
- Fixed Monthly Instalment: A predetermined amount is deposited every month until the selected tenure ends.
- Range of Tenures: The available tenure may range from a few months to several years, depending on the institution.
- Low Starting Amount: Some banks may allow an RD to be started with a monthly deposit of ₹100, subject to their terms.
- Early Withdrawal: Premature withdrawal may be permitted, although a penalty or revised interest rate may apply.
- Quarterly Interest Compounding: Some institutions may compound the interest every quarter, depending on the applicable RD terms.
- Interest on Deposits: RD instalments earn interest at the applicable rate, which may differ across banks and financial institutions.
- Loan Against RD: Some banks may allow the RD balance to be used as security for a loan or overdraft facility, subject to applicable conditions.
- Additional Interest for Senior Citizens: Banks may offer an additional interest rate to eligible senior citizens, subject to their applicable terms.
Benefits of Investing in a Recurring Deposit
The following are some recurring deposit benefits.
- Disciplined Saving Habit: Regular monthly instalments may help create a structured saving routine over the selected tenure.
- Low Minimum Deposit: An RD may be started with a relatively small monthly amount, depending on the bank or financial institution.
- Relatively Lower Risk: RD deposits with eligible banks may be covered under the applicable deposit insurance framework, subject to the prescribed limits and conditions.
- Flexible Tenures: Banks may offer different tenure options, allowing depositors to select a period from the available range.
- Potentially Higher Interest Than a Savings Account: RD interest rates may be higher than savings account rates, although the applicable rates vary across institutions.
- Loan or Overdraft Facility: Some banks may allow an RD to be used as security for a loan or overdraft facility, subject to applicable terms.
The actual features and benefits may vary between banks and financial institutions.
Risks and Limitations of Recurring Deposits
The following are some limitations associated with recurring deposits.
- Limited Liquidity: The deposited amount remains committed for the selected tenure, and premature withdrawal may be subject to applicable conditions.
- Premature Closure Conditions: Early closure may involve a penalty or a reduction in the applicable interest rate, depending on the institution's terms.
- Penalty for Delayed Instalments: A penalty or other charge may apply if a scheduled instalment is not paid on time.
- Tax on Interest Earnings: Interest earned on an RD is taxable according to the applicable income tax provisions. TDS may also apply when the prescribed conditions are met.
- Inflation Risk: The value of the returns may be affected if inflation remains higher than the interest rate earned on the deposit.
Tax on Recurring Deposits and TDS Rules
Interest earned from a recurring deposit (RD) is taxable as per the applicable income tax rules. TDS may be deducted when the total interest from all RD accounts with a bank exceeds the applicable threshold during a financial year.
Particular | Details |
TDS threshold | ₹40,000 for general depositors and ₹50,000 for senior citizens |
TDS rate | 10% when PAN is furnished |
Higher TDS rate | 20% may apply when PAN is not furnished |
Interest considered | Total interest from all RD accounts held with the bank during the financial year |
Example: If a general category investor earns ₹4,000 as RD interest during a financial year, the amount is below the ₹40,000 threshold. Therefore, the bank would not deduct TDS on the RD interest under the stated threshold.
Conclusion
A recurring deposit allows regular amounts to be deposited over a selected tenure and earn interest at the applicable rate. Its structure differs from a lump-sum deposit because the fund is deposited through periodic instalments. The interest calculation depends on the deposit amount, tenure, applicable rate, and compounding method. Account terms may also cover delayed instalments and premature closure. Tax rules apply to RD interest, while TDS may apply when the prescribed conditions are met. Reviewing the applicable account and tax terms may help readers understand the deposit before opening an RD.
FAQs on Recurring Deposit
What is the TDS on a recurring deposit?
TDS on RD interest may apply when the interest paid or credited crosses the applicable threshold prescribed under the prevailing tax provisions.
What is the difference between a recurring deposit and a fixed deposit?
An RD involves regular instalments, while an FD generally involves a lump-sum deposit made for a selected tenure.
Can I withdraw my recurring deposit before maturity?
Premature withdrawal may be permitted according to the bank's terms. A penalty or reduced interest rate may apply in such cases.
What is the minimum amount required to start a recurring deposit?
The minimum amount varies across banks and financial institutions. For example, SBI currently specifies ₹100 per month for its RD.
What is the difference between RD and FD?
An RD involves periodic deposits, whereas an FD generally requires a lump-sum deposit. Both may earn interest according to applicable account terms.
Can I withdraw my RD before maturity?
Early withdrawal may be permitted under the applicable account terms. The institution may apply a penalty or revise the applicable interest rate.
What is the minimum amount to start a recurring deposit?
The minimum deposit depends on the bank or financial institution. Each institution may specify its own minimum monthly instalment and other conditions.
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