5 things you must know about recurring deposits

5 things you must know about recurring deposits

Today's investors may be going ga-ga over mutual fund systematic investment plan, but the idea originally was started by banks for recurring deposits or RDs. Bank depositors over the years grew to trust this investment product immensely. Little amounts of money stashed away in the bank every month earned recurring deposit the stature of a dependable and friendly deposit. It offers competitive interest rates, flexibility to deposit money every month and the guarantee of the bank neatly bundled in one single window. Let us learn the five most important things about recurring deposits.

Recurring deposits give good interest rates. This is one of the first things to understand. For instance, IDFC Bank offers 7.25% interest per annum in tenures starting from 12 months to 36 months. Hence, Rs 2000 recurring deposit kept for two years or 24 months will fetch a maturity amount of over Rs 51,000 with quarterly compounding. In many banks, recurring deposits are currently available only for domestic and senior citizens. Use a recurring deposit calculator to understand how much money you can earn.

The second thing to understand what happens to the recurring deposit and recurring deposit interest rates if you stop mid-way or do a premature withdrawal. First of all, some banks do not impose any penalty if you skip a month. A financial crunch can happen. Secondly, in case of a premature withdrawal, there are some rules. In case of premature withdrawal before 30 days, most banks do not pay any interest. In case of premature withdrawal after 30 days and before six months, the banks usually pay the interest rate applicable to the fixed deposit card rate applicable for 30-45 days tenure.

The tenure of your recurring deposit is very important to know. Banks have a minimum tenure of six months, but the recurring deposit interest rates are lower for short tenures. For instance, a 6-month recurring deposit with IDFC Bank fetches you 6.75% but a 9-month one gets you a higher 7% interest rate. Recurring deposit tenures can go up to 10 years or 120 months. Do remember the interest calculated is rounded up to the nearest rupee. It is also calculated on the basis of 365 days a year. In case of leap year, the calculation is on the basis of 366 days in the year. The first instalment of the RD is debited on the date of opening of the recurring deposit account. Subsequent instalments are debited on the selected day of the month.

Taxes are applicable to recurring deposits. This is the fourth factor to understand and consider. When you use the recurring deposit calculator to know the maturity amount, it may be a better idea to also compute the post-tax maturity amount due to income tax. The interest earned on a recurring deposit is considered as income from other sources and hence added to your overall income. Based on which slab you fall in, the tax on the recurring deposit returns is calculated. If you are in the highest tax bracket of 30%, it will be taxed at that high rate. If you are at 20%, the tax rate will be 20%. Do note that the tax deducted at source or TDS is deducted if the interest income crosses the Rs 10,000 mark. 

The fifth important thing to know about recurring deposits is the documentation. Most banks do not allow resident individuals to open a recurring deposit without a linked savings account. Yes, that is correct. This is because a recurring deposit will be created subject to sufficient availability of funds in your savings account. The amount of deposit, primary as well as future ones, will be debited from the savings account. So once the savings account is opened, the banks do not need any further documentation to open an RD. On maturity, the total funds, including the amount due to recurring deposit interest rates, will be credited to the savings account selected by you for opening the recurring deposit.

Connect with us at IDFC bank to invest in a recurring deposit, today.

See More

Related