Features of Bank Recurring Deposit

Bank Recurring Deposit or RD is an investment instrument that allows investors to make regular monthly payments. It is also a means to save money for the long term. Investors can choose the tenure of the deposit and the minimum monthly payment they wish to make according to their convenience. Recurring deposit schemes are generally more flexible than bank fixed deposit. They are generally preferred by those who want to start an account to save money and build an emergency fund.

Almost all the banks in India offer a recurring deposit account. Interest rates depend on the market trends prevalent at the time of creating the account. Once you open an account and begin investing, the interest will remain the same for the duration chosen. For this reason, RD schemes make a great choice for salaried individuals who earn a fixed income every month and can invest a regular amount every month.

If you miss several consecutive payments, the bank may choose to close down your recurring deposit account. Some recurring deposit schemes are also flexible in the way they allow you to make payments anytime during the month.

The bank has special powers to end an RD account before its maturity. The bank can utilize the funds in recurring deposit accounts for lending to businessmen. The bank may also invest these funds in profitable areas.

A customer can give standing instructions to the bank to credit the recurring deposit account every month from his/her savings account or current account.

Bank Recurring Deposit has the following characteristic features:-

1] Entry Age Restriction –

A person needs to be above 18 years of age to open and deposit in a bank recurring deposit. Minors can open a bank recurring deposit, but it is to be operated by the natural guardian.

2] Investment Conditions –

Bank recurring deposit has a certain investment conditions. In India, a minimum of Rs. 100 per month have to be deposited at regular intervals in the recurring deposit account.

There is no limit on the maximum amount that can be deposited in a recurring deposit account.

3] Interest Rates –

The interest rate offered by banks on recurring deposits varies from bank to bank. The rates of return vary depending on the tenure of the deposit selected. For medium-term deposits, the rates are generally the highest. For long-term deposits, the rates are usually slightly lower as the deposit holder stands to gain a higher amount of interest overall.

A method of earning on the capital deposited is to invest in the deposit that provides a high rate of interest with the tenure being as short as possible.

Senior citizens receive higher interest rates as compared to general individuals.

Bank recurring deposits currently have interest rates ranging around 6.25% to 7.25% per annum.

Given below are Interest Rates of Recurring Deposit of Major Banks August 2018:-

Given below are interest rates on recurring deposits offered by small finance banks:-

4] Tenure of Deposit –

Tenure of deposit is the time duration for which an investor deposits/invests his/her funds. The funds remain locked-in for this tenure (early withdrawal subject to conditions). The tenure of bank recurring deposits is from 6 months to 10 years.

The tenures are divided into three categories:

• Short-Term Tenure: A short-term tenure usually lasts from 6 months to a year.
• Medium-Term Tenure: A medium-term tenure usually lasts from more than a year to 5 years.
• Long-Term Tenure: A long-term tenure lasts from more than 5 years to 10 years.

5] Nomination Facility –

Bank recurring deposit provides nomination facility. Nomination is a facility that enables deposit account holders to nominate an individual. He/she can claim the proceeds of the deposit accounts or contents of the safe deposit lockers, post the death of the original depositors.

There can be only one nominee per deposit. But, different deposits can be nominated in favour of different individuals.

6] Exit Option –

All banks that offer the facility of opening a recurring deposit account also provide the option of premature withdrawal with it. The interest payable will be calculated based on how much of the tenure is completed. The bank will also charge a premature withdrawal penalty. Thus, while investing a bank that offers high rate of interest and charges a low fee on premature withdrawal should be chosen.

Terms and conditions about withdrawal, closure and renewal of recurring deposits vary from bank to bank.

• Premature Withdrawal of Recurring Deposit:

If the account holder withdraws the deposited amount before its maturity, the rate of interest that is received will be the one applicable to the period for which the deposit has remained with the bank. Penalty will also be levied by the bank for premature withdrawal.

Usually, the minimum lock-in period for an RD account is 3 months. If a premature withdrawal is made before this period, the account holder would earn zero interest and only the principal amount that was deposited would be refunded to him/her by the bank.

Besides penalty on interest, the depositor is not eligible for incentives offered by the bank on the recurring deposit.

• Partial Withdrawal/Loan Facility of Recurring Deposit:

Partial withdrawal of RD is not allowed by banks. Most banks do not allow partial withdrawal. But some banks offer an alternate option in the form of loans or overdraft up to 90% of the deposit balance. This is made available by pledging the balance in recurring deposit account as collateral. The loans or overdrafts are available at the discretion of the bank at a rate fixed by the bank, which varies from time to time. The loan interest rate will typically be more than the interest rate of the recurring deposit account.

• After the recurring deposit account matures you can choose to close the account and use the returns for your personal needs. Or, you can ask your bank to transfer the amount to a fixed deposit account where it will earn more returns.