Recurring Deposit is most popular Small Saving Scheme in India. In small cities and towns, you will not find even a single household without Recurring Deposit or RD Account (Recurring Deposit account is popularly known as RD). When i was kid, on 5th of every month my mother used to give me Rs 500 and her Recurring Deposit Passbook to be handed over to the Post Office agent. On 10th of every month, i used to collect it back with an entry for the month in Recurring Deposit Passbook. Recurring Deposit is blessing in disguise for small investors. Recurring Deposit can be opened with an investment as small as Rs 10 per month in Post Office. In Private Banks the min investment per month is Rs 1000 whereas in Govt Bank like SBI it is Rs 100. The installment of RD once fixed cannot be changed till the account mature.
The interest rate offered on Recurring Deposit is equal to prevalent Fixed Deposit Rates. The interest is compounded quarterly therefore effective yield is less compared to interest rate offered. The min investment period of Recurring Deposit varies from bank to bank. In PSU Banks min period is 1 year whereas in Private Banks it is 6 Months. The maximum period is 10 years for all the banks. The Post Office Recurring Deposit account is quite different from the ones being offered by banks. The interest rate of Post Office Recurring Deposit is 8.4% and Recurring Deposit tenure is fixed for 5 years. The interest cannot be accrued on monthly basis but is being paid only at the time of maturity.
The biggest misconception about Recurring Deposit is that interest is Tax Free because TDS is not deducted. The fact of the matter is that interest is fully taxable as per Income Tax slab of the individual i.e. a person in 30% tax bracket has to pay 30% tax on Interest received. Interest earned from Recurring Deposit cannot be claimed as deduction u/s 80TTA. 80TTA provide exemption only for interest earned from savings account. Deduction u/s 80TTA is not applicable for interest from RD. Recurring Deposit is not suitable for individuals in highest tax bracket as the post tax yield is just 6.3% which cannot beat inflation.
Recurring Deposit is Best For
(a) If you are in lowest Income Tax bracket of 10% or there is no taxable income
(b) Senior Citizens or Retirees
(c) If a predetermined/ fixed maturity amount is required on a specific date
(d) Amount of Investment is Low
Smart Tips for Recurring Deposit
1. You can open Recurring Deposit through Net Banking facility of most of the banks like HDFC Bank or ICICI Bank.
2. Recurring Deposit booked online cannot be liquidated prematurely online. You need to submit written request at the branch for premature liquidation of Recurring Deposit account.
3. It is advisable to open multiple Recurring Deposit accounts so that if you need funds in between than you can liquidate only 1 or few RD as per requirement without impacting others
4. Avail Nomination facility
5. PSU Banks like SBI provide Loan / overdraft facility of upto 90% against balance in RD account.
6. Last but not the least, it is advisable to open Recurring Deposit in the branch near to your current or permanent residence
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