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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Just to add to your points: ICICI Bank offers a flexible RD scheme called iWish. In this scheme, you can choose to deposit any amount of money in a month. The interest rates also are competitive with FD rates.
Thanks for sharing this useful information. Flexible RD Scheme is useful if the investor is not sure whether he or she will be able to deposit fixed amount every month or month.
Hi.. i want to know is’t RD interest is Taxable ? like how FD interest more than 10,000 TDS is deducted by bank.
As i mentioned in my post, RD (Recurring Deposit) interest is fully taxable. Secondly exemption of Rs 10,000 is only on Savings Bank Interest not on FD Interest. If TDS is not deducted then it doesn’t mean that interest is non-taxable. You have to club the interest in your income and pay tax.
Even FD interest upto 10,000 exempt in a financial year, above that bank deducts TDS. So I want to know is there any exemption to RD interest. And I’m getting interest 9800 on FD now I want to open RD account of sum amount which gives me a proxy 4800 interest. So I want to any chance bank deduct TDS mixing these both interest
As i mention banks don’t deduct TDS upto 10k but interest on FD is 100% taxable. You have to include it in your income and pay tax. The exemption of Rs 10000 is available only on savings bank interest. Interest received from RD is fully taxable, there is no exemption available.
Hi..I just want to know that on opening a RD account in HDFC through net banking did they deduct each month installment automatically or you need to deposit into your RD account every month..If you need to deposit then how can it will be done through netbanking
Installment for RD will be deducted automatically from the linked savings account.
One smart tip for Rd : Open the Rd on the 1st /2nd of any month,then the 2nd month installments can be paid even on last day of that month but last instalment must be paid on the day it was opened. Again if you miss an instalment,the you can regularise the account by depositing the missed installments plus one instalment.Most banks don’t penalize prepayment. Hence it’s advisable to open the account for the max period earning maximum rate to get optimum interest. Let a senior person ( 60 yrs plus ) be the Ist depositor in the joint account with your self ( repayable jointly or survivor) to earn extra .50 % interest and also to save income tax on interest.Please to submit Form 15H every April to stop tds deduction. The power of compounding in RD is known as the 8th wonder of the world of wealth creation.
Thanks for sharing :)
Hi i want to know if the 5 year recurring deposit account in post office provide the tax benifits under 80c
No
Dear Sir, Please tell When to pay income tax on my post office Recurring Deposit (RD). Can I pay tax on interest income on maturity of RD as now 5 years are over and I have not shown the interest income in previous year ITRs. Thanks.
No need to worry…You can pay tax at the time of maturity for the interest earned in last 5 years.