What is RD? - Know About the Features and Benefits

 

What is RD? - Know About the Features and Benefits

RD or Recurring Deposit is a popular and trusted investment scheme among varied age groups. A recurring deposit refers to making regular deposits. RD is a service offered by most banks where you can make regular deposits to earn decent returns.

In this article, let us understand everything related to the question – ‘What is RD?’, including its features, benefits, and how to set up an RD account.

How Does a Recurring Deposit Account Work?

RD full form is Recurring Deposits, where you can make monthly instalments. A recurring deposit gives you an opportunity to grow your monthly savings over a fixed period of time. Here is an overview of how a Recurring Deposit works: -

  • After opening a Recurring deposit account, you can make monthly instalments.
  • The tenure of an RD is account is usually between 6 months and 10 years.
  • An interest is paid to over your funds and is usually compounded quarterly.
  • At the time of maturity of an RD, you receive your investment along with the interests earned on them over the period of the scheme.

What is a Recurring Deposit? 

With recurring deposits, the customers have the flexibility to invest a sum of their choice every month and save as per their convenience. This is the primary difference between FD and RD.

Many banks offer recurring deposits with a tenure that ranges from 6 months to 10 years. The interest rates remain fixed over the tenure. And just like Fixed Deposit, the principal is received on maturity, and you can choose to receive the interest at regular intervals or at the time of maturity.

Features of Recurring Deposit Account 

Here are some of the key features of a Recurring Deposit account: -

· Fixed Income Investments 

Recurring deposits are a type of fixed-income investment. It offers a guaranteed return on maturity. The interest rate is known before investing the money. Moreover, the interest rates do not change during the time period of the deposit.

· Minimum Investment 

The minimum investment required to open an RD account is only Rs. 100 per month. If you have sizeable excess income such as Rs. 1000 that you can invest each month, recurring deposits are ideal for you.

· Time Period 

An individual can open a recurring deposit account for a minimum of 6 months and can go up to 10 years. RD full form is Recurring Deposit, which gives you the flexibility to choose the time period as per your convenience.

· High Rate of Interest 

The interest rates provided for recurring deposits are higher compared to a regular savings account. Most banks compound the interest after every quarter.

· Lock-in Period 

A recurring deposit account comes with a lock-in period of 30 days to 3 months which is subject to the service provider’s discretion. Any withdrawals made during the lock-in period will not attract any interest.

· Premature Withdrawals 

The customers are allowed to make premature withdrawals under a recurring deposit with a penalty being levied.

· Loan Facility 

You can avail of overdraft or loan facilities against a recurring deposit. Default payments on the loan are adjusted against the funds available in the RD account.

What Should You Know About RD Interest Rates? 

RD full form is Recurring Deposit, which is a risk-free investment and one of the most popular investments available. You earn interest on the invested sum as per the interest rates offered by the banks.

The interest rates for a recurring deposit are estimated after considering various factors such as invested funds, tenure, and the recurring deposit scheme selected. You can calculate interest using the following formula: -

M = R [(1+i) n – 1]/ 1 – (1+i) -1/3

In the formula,

‘M’ stands for maturity value

‘R’ stands for monthly instalment

‘n’ stands for the number of quarters

‘i’ stands for rate of interest/400

Recurring Deposits are safe and offer guaranteed returns since RD interest rates remain constant. It is essential to compare the RD rates offered by different banks in the country before investing in a recurring deposit or renewing an existing one. It is best to invest in an RD with the highest interest rates available to gain maximum returns.

Factors to Consider Before Opening RD Account 

After understanding ‘What is RD?’ let us look at the factors to consider before investing in this scheme. Here are some of the factors you should consider before opening an RD account: -

· Investment Amount 

Under a recurring deposit account, the minimum investment amount required is Rs. 100. Since it does not require a lot of funds to be opened, a recurring deposit is a convenient investment scheme. Figuring out your investment amount is an important factor to consider before opening an RD.

· Tenure 

The period or tenure of a recurring deposit ranges between 6 months and 10 years. Once you open an RD account, you cannot alter the tenure till the maturity of the RD. Make sure to choose the tenure as per your requirements to gain maximum returns.

· Interest Rates

You earn an interest of your investment every month. The interest rates may vary from bank to bank. Therefore, it is best to choose the recurring deposit that offers the highest interest rates.

· Taxation on Interest 

RD full form is Recurring Deposit, and the interests earned on them are taxable. The minimum taxable earned interest is Rs. 40,000. So, if the interest earned on RD is less than Rs. 40,000 (or, Rs. 50,000 for senior citizens), no tax will be deducted by the bank. If you submit a 15G/15H Form to the bank mentioning that your income is below the tax limit, the bank will not deduct any tax.

· Withdrawals 

You must consider the fact that partial withdrawals are not allowed under a recurring deposit. However, you can make premature withdrawals with some penalties being levied.

· Taxation on Interest 

RD full form is Recurring Deposit, and the interests earned on them are taxable. The minimum taxable earned interest is Rs. 40,000. So, if the interest earned on RD is less than Rs. 40,000 (or, Rs. 50,000 for senior citizens), no tax will be deducted by the bank. If you submit a 15G/15H Form to the bank mentioning that your income is below the tax limit, the bank will not deduct any tax.

· Withdrawals 

You must consider the fact that partial withdrawals are not allowed under a recurring deposit. However, you can make premature withdrawals with some penalties being levied.

 

Advantages of Investing in RD 

Now that we understand ‘What is RD?’ and how it works, let us look at the advantages of opening an RD account. Here are some of the key benefits provided under RD: -

· Safe Investment 

RD full form is Recurring Deposit, which carries very little risk to no risk at all. By investing in an RD offered by a stable bank, you can ensure that your savings stay safe. An RD is a simple investment that offers fixed returns because it does not dabble in the markets. Since the interest rates do not change over the period of investment, you do stand to lose any funds.

· You Earn While You Save

A recurring deposit help grow your savings as the earned interest is accumulated and increase over the tenure of the RD. So, the longer the tenure, the more interest you earn.

· Lump-sum Pay-Out 

The maturity amount is paid out at the end of the tenure as a lump sum. This amount includes your investments and the interest earned on them. You can use the lump sum to achieve your financial objectives.

· Online Access 

Since most banks offer online internet banking services, you can open a recurring deposit account, access them and observe their progress over time. You can pick your tenure, deposit amount, and view the interest rates offered with the online access.

· Loans Against RDs 

RD full form is Recurring Deposit, which offers the facility to borrow loans against them. Banks offer lower interest rates on loans of your borrow against a recurring deposit.

· Higher Interest Rates for Senior Citizens 

The recurring deposit schemes offer a higher rate of interest for senior citizens. This is a significant benefit for older people to earn more returns.

How to Set Up an RD account? 

You can open a recurring deposit account either online or offline.

Online Process 

  • First, log in to your net banking account.
  • Then, select the ‘Open an e-RD Account’ option.
  • Mention the account from which you wish the funds to be debited, the investment amount, and the tenure. Make sure to check the interest rate applicable and specify the nominee for the RD account.
  • Confirm that you agree to all the terms and conditions after you check the maturity amount.
  • Finally, submit the application. You will receive a message and an email with the RD receipt.

Offline Process 

  • You need to visit the nearest bank branch where you have a savings account.
  • Then, fill up the RD application form with the details, including investment amount, payment mode, tenure, nominee, etc.
  • Pay the funds for the first instalment through cheque or cash.
  • The bank service provider will process your application within the stipulated time.

Who Can Invest in a Recurring Deposit? 

RD full form is Recurring Deposit, and the eligibility criteria for opening one in a bank or a Post Office are the same. However, you must own a savings account to open an RD account. Here are the entities that are eligible to open an RD account. 

  • Individual savings account holder
  • Minors above 10 years of age
  • Minor below or equal to 10 years of age under natural or legal guardianship
  • A corporate, company, proprietorship, or commercial organization
  • A government organization

Who Can Invest in a Recurring Deposit? 

RD full form is Recurring Deposit, and the eligibility criteria for opening one in a bank or a Post Office are the same. However, you must own a savings account to open an RD account. Here are the entities that are eligible to open an RD account. 

  • Individual savings account holder
  • Minors above 10 years of age
  • Minor below or equal to 10 years of age under natural or legal guardianship
  • A corporate, company, proprietorship, or commercial organization
  • · A government organization

 

Documents Required to Open an RD Account 

Here are the documents required to open an RD account: -

  • RD application form.
  • Passport size photographs.
  • Identity proof
  • Address proof
  • KYC documents if the bank requests them.

Frequently Asked Questions (FAQs)

Q1. Is interest earned on recurring deposits taxable? 

Yes, the interest earned recurring deposit is taxable.

Q2. Do Senior citizens receive extra benefits on their Recurring Deposits? 

Yes, most banks in India provide a higher interest rate on RDs to senior citizens.

Q3. What is the minimum tenure for Recurring deposits? 

The minimum tenure for Recurring Deposit (RD) is 6 months. Most banks provide RD schemes for a minimum tenure of 6 months to 12 months.

Q4. How much interest can I earn through a Recurring Deposit account? 

The interest rate for an RD account varies from bank to bank. The interest earned depends on the amount you have deposited, the tenure, and the interest rate offered by your bank.

Q5. What is the minimum amount required for opening a Recurring Deposit account? 

The minimum amount required for opening a Recurring Deposit can be as low as Rs.100.

Q6. Who can open a Recurring Deposit (RD) account? 

Anyone can open an RD account. Some banks allow people to open a joint RD account and you can also open this account in the name of their minor child.

Q7. Can I withdraw my Recurring Deposit before the term is over? 

Yes, you can make premature withdrawals on your RD. However, you will be charged a little penalty.

Q8. How can a depositor withdraw the principal amount deposited before its maturity in a recurring deposit account?

To make a premature withdrawal of RD, the investor needs to submit a request with the bank or financial institution with whom the recurring deposit account was opened. Forms for making a premature withdrawal are usually available both online on the website of the deposit holder and offline at the branch of the financial institution.

 

Source:

https://www.mca.gov.in/MinistryV2/rd+documents.html

https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7378

https://economictimes.indiatimes.com/wealth/calculators/rd-calculator

https://economictimes.indiatimes.com/wealth/calculators/rd-calculator

https://www.mca.gov.in/MinistryV2/rd+documents.html

ARN No: Nov22/Bg/09B