Benefits of Recurring Deposit scheme
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Recurring Deposit scheme is offered by almost all banks (RD
schemes of SBI, PNB, ICICI Bank, HDFC Bank, IDBI Bank, Bank of India, Bank
of Baroda, Corporation Bank ) in one form or the other. Recurring Deposit
is very popular among the salaried class, specially who can afford to save
only few hindered or say few thousand rupees per month. This scheme is a
boon for people who do not have a large amount of savings and thus can not
use the Fixed Deposit scheme of the banks. Under this scheme, the customer
deposits a minimum amount (normally fixed) every month, and bank pays the
interest at the pre-determined rates (which is usually the same as
applicable to fixed deposits ). At the end of the period i.e. on maturity
date, the customer is paid the maturity value i.e. principle deposited and
the interest payable.
Calculate your maturity amount for various amounts
Start a recurring deposit to gain from high rates
Sakina Babwani | :With
interest rates almost at their peak, it is the right time to lock your funds in
good debt instruments. But what if you don't have a lump sum to invest? This is
in handy. Anindya Mitra, senior vice-president , retail liabilities product
group, HDFC Bank, says, "Interest rates have peaked and are likely to come down
now. So, it's a good time to invest in recurring deposits at the current rates.
These score over fixed
you don't have to invest a large sum at one go while the interest rates are
almost the same."
How do these work?
Recurring deposits are your SIPs in
fixed deposits. The investor chooses a tenure and amount he wishes to invest
every month. The interest rate fixed at the time of opening the account remains
fixed for the
the term So, if you lock in at 9.5% for a 10-year deposit right now, you will
continue to earn that high rate till the deposit matures in 2022. At the end of
the tenure, you will get around 10 lakh in lump sum.
Any individual or HUF can open a recurring deposit with a bank or
post office. The minimum investment is 100 at most banks, while post offices
accept even an initial amount of 10. Some banks have an upper limit of 15 lakh
and the tenure varies from six months to 10 years. Senior citizens are eligible
for a higher rate of interest, usually 0.5% more than that for other investors.
Typically, a bank insists that you open a savings account with it
before opting for a recurring deposit . This is because your monthly
installments will be routed through this account.
"While NRIs cannot open a recurring deposit in a post office,
they can set up an account under their NRE accounts with banks or other
financial institutions," says Suresh Surana, founder, RSM Astute Consulting
Keep in mind
Experts advise that you fix the monthly installment according to
your needs and affordability so that you don't miss an installment in the
future. "It is important that you don't over-commit by agreeing to pay a high
amount, which you may find difficult to pay later . This may lead to a default,
which could result in a penalty," says Jayant Pai, CFP & head, marketing , Parag
Parikh Financial Advisory Services. The penalty will depend on the monthly
instalment and the number of days by which you have delayed the payment. It will
be deducted from the interest that has been accrued on the deposit till then.
If you default frequently, your account could even be shut down.
"If you fail to pay the instalments on time, the bank or post office has the
right to close your recurring
In such a case, the interest rate applicable to your account will be altered
according to the premature withdrawal policy of the institution," says Sumeet
Vaid, founder, Ffreedom Financial Planners.
Each bank has its own policy on dealing with defaulters. HDFC
for at least 5 months before shutting down your account . The post office
excuses a defaulter four times and also extends the payment period to two
months, after which it will axe the account. DCB Bank does not charge a penalty,
but considers an account inactive if you do not deposit any money for two years.
You cannot opt for partial instalments . For instance, if you pay
2,000 a month, you cannot break this up in two instalments of 1,000 each. Also,
you cannot pay more than the fixed amount every month. Even if a bank allows you
to deposit more, the money will not earn any interest.
If a recurring deposit gives the investor the benefit of a fixed
rate, it also doesn't allow him to change the tenure. If you need the money very
badly, you can withdraw after one year in case of the post office and three
years for most banks. Some banks charge a penalty for premature withdrawal , so
check your bank's policy before you start a deposit.
There is no tax deduction or exemption available on the amount
invested. In fact, the interest earned on the amount is fully taxable . The tax
has to be paid every year as it accrues even though you will get the amount on
"In case of minors who have a joint account with their parents,
the interest accrued will be clubbed with the income of the parent whose total
income is higher ," says Surana. The only benefit is that tax is not deducted at
source so senior citizens and those with a low income will not have to submit
form 15G and form 15H to avoid TDS. For others, it means paying tax on their
own. "The investor will have to pay tax on the interest income by way of advance
tax or self-assessment tax," says Parizad Sirwalla, partner, KPMG India.
Times of India