Overview of Bank Recurring Deposit
3 min readA Bank Recurring Deposit or RD as it is commonly called is a unique term deposit offered by banks. Bank Recurring Deposit refers to the periodic deposit of a fixed sum of money with a bank into a special deposit account, with a specified tenure. The tenure is generally between 6 months and 10 years.
A bank recurring deposit is most commonly used by people with a regular income to set a portion of their income aside each month in order to make a large purchase in the future. When the recurring deposit account is opened, the maturity date and monthly installments are agreed upon between the depositor and the bank. If any installment is missed or delayed, interest payments towards the account are deducted as a penalty. This is generally specified when the account is opened.
The rate of interest on recurring deposit accounts is generally comparable to that of fixed deposit accounts. It is more than interest rates of savings account. The interest rate, once determined, does not change during the tenure. The Reserve Bank of India ensures that strict guidelines are followed.
It is an investment tool which allows those with an ability to make regular deposits earn decent returns on their investment. A bank recurring deposits provides flexibility and ease of use to individuals. Deposit holders can choose to invest a particular amount each month, ensuring that they have enough income for an emergency.
Almost all major banks in India offer a Recurring Deposit Account. At the end of the tenure, the individual will be paid a lump sum amount which includes the original investments and the interest earned on them.
Bank Recurring Deposit Suitablility
- For:-
Investors who are who are seeking assured returns by investing regularly. It is for investors with medium term goals which are at least 5 years away.
- Not for:-
Investors who are looking for wealth creation over a long term should not invest in bank recurring deposit. The reason behind this is inflation. The returns from the recurring deposit would not be able to beat inflation over a longer period of duration.
Guaranteed Returns
The principal amount deposited earns interest at regular intervals and the lump sum is handed over to the depositor at the time of maturity. Bank recurring deposit is a safe investment option and the return on investment is mostly guaranteed.
Return’s changes pose risks to existing deposits. For instance, you may have locked-in at a lower interest rate, but due to economic factors, you get higher returns on the deposit later.
The returns are equal to that earned from a bank fixed deposit and are higher than savings bank account.
Given below are the current Interest Rates of Recurring Deposit of Major Banks August 2018.
| Bank |
Interest rates on Recurring Deposits | |
|
For General Individuals |
For Senior Citizens | |
| Axis Bank |
7% to 7.1% |
7% to 7.3% |
| Citibank |
6% to 7% |
6.2% to 7.2% |
| Federal Bank |
7% |
7.50% |
| HDFC Bank |
6% to 7.25% |
6.5% to 7.75% |
| ICICI Bank |
6.6% to 7% |
7.1% to 7.5% |
| IDBI Bank |
6% to 6.75% |
6.5% to 7.25% |
| Kotak Mahindra Bank |
6.5% to 7.25% |
7% to 7.75% |
| Punjab National Bank |
6.25% to 6.75% |
6.75% to 7.75% |
| State Bank of India |
6.7% to 6.85% |
7.2% to 7.35% |
| Yes Bank |
7.10% |
7.60% |
Inflation Effect
Bank recurring deposits are not inflation protected. Which means when inflation is higher than the deposit interest rate, the deposit will not earn any real returns. Bank recurring deposits will only give a real rate of return when inflation is lower that deposit interest rate.
Liquid Investment
The bank recurring deposit has a lock-in period. No withdrawals are allowed. But, the bank may allow closing the account before the maturity period. This entails to payment of a penalty for closing the deposit account prematurely.
There is no specific amount that a bank charges on premature withdrawal of your deposit. The interest rate received on the deposit is lesser. The cut-off in interest rate depends upon the duration of the deposit remaining.
Tax Benefits
No tax benefits available on these bank recurring deposits. The interest earned on after the completion of the tenure of the deposit is taxable. It is treated as income while computing the income tax. It is recorded under the head ‘income from other sources’.
Effective from June 1, 2015, TDS is deducted on interest income above Rs. 10,000 at a rate of 10%. This exemption limit of TDS for senior citizens is Rs. 50,000.
Alternative Investment Options
If an investor doesn’t want to invest in bank recurring deposit, it has the following alternatives available, which have almost the same characteristics:-
- SIP in Debt Mutual Funds
- Post-Office recurring Deposits
2 thoughts on “Overview of Bank Recurring Deposit”