By Molly Cyrus 
Introduction
The RD is one of the most sought after financial instruments in the personal finance segment especially for those individuals who wish to inculcate a habit of saving regularly. It is sure to appeal to persons who cannot make the lump sum investment but would like to deposit fixed sum money every month to carry on time with an assured return. This simplicity and safety attract conservative investors in search of steady returns without any risk typically associated with equity markets.
The various features advantages and disadvantages of recurring deposits are discussed along with their types of tax implications and how they compare to other savings instruments. In addition to that the readers will also learn best practices that help them to choose a Recurring Deposit.
What is a Recurring Deposit?
A Recurring Deposit (RD) is a fixed deposit offered by banks and post offices whereby a person can deposit a fixed amount on a periodic basis usually on a monthly basis for a fixed period. Upon maturity of the RD period the investor gets back his principal amount plus the interest he has earned. The feature of a recurring deposit is that it promises a return and that too at a predetermined rate of interest with a calculation already made at the time of opening the deposit.
It is applied to low risk individuals who are hungry to develop the savings habit. Compared to market linked products like mutual funds or stocks in which returns are susceptible to fluctuation RD provides a feeling of financial security as these also assure fixed returns. Thus these are in vogue among the people who follow the conservative investment strategy.
Important Features of Recurring Deposits
Here are some of the most crucial features that may make recurring deposits a pretty attractive saving tool such as
Fixed Monthly Deposits
An investor has to deposit a fixed amount every month into an RD account.
Tenure
The period for which an RD can be opened varies from 6 months to 10 years depending upon the bank or financial institution.
Interest Rates
The interest rate is usually fixed at the time of opening the account and does not vary in the tenure.
Guaranteed Return
Owing to the fact that the interest rate is fixed the returns at the end of the tenure are sure shots and calculable.
Little Risk
RDs are one of the least risky investment options as they are never affected by market volatility.
Premature Withdrawal
Almost all banks have a facility for premature withdrawal but sometimes there are penalties.
Loan Against RD
Many banks also provide the facility to take loans against the accumulated balance of RD.
Taxable Interest
The accrued interest in the RD account is taxable.
How Recurring Deposits Work?
A Recurring Deposit account is based on the principle of saving money periodically over a stipulated period. Here’s how an RD account typically works
Opening the Account
You can open an RD account at any of your preferred banks and post offices. During the opening time of an account you should decide about the sum that you would like to deposit every month and the tenure of the RD.
Monthly Instalment
At every single month a fixed amount of savings will be made into the RD account. Such facilities are offered through many banks were auto debit will be provided so that the monthly savings from the particular savings account will be directly transferred to the respective RD account.
Calculation of Interest
The bank’s current rate of RD is applied to the deposit and this is maintained throughout the tenure of the RD. The interest is compounded quarterly. That is you earn interest on your principal amount as well as the interest accrued.
Maturity
At the end of the tenure the total amount of all the deposits along with the interest accrued is paid to the depositor.
Types of Recurring Deposits
There are several types of recurring deposits meant to meet other customers needs
Regular RD
It is the most popular type of RD and gives a fixed amount to the depositor every month and provides a preset rate of interest.
Flexi RD
There are some banks wherein you are allowed to vary your monthly deposits according to your situation for example you may not have to deposit money at times and in that case a minimum amount might come as a prerequisite.
Post Office RD
The Indian postal department offers this form of RD which delivers the same facility that an RD would in a bank but with the advantage of added trust and security especially among rural and semi urban populations.
Senior Citizen RD
This is one such specific type of RD for senior citizens that would attract a higher rate of interest compared to normal recurring deposits.
Advantages of Recurring Deposits
There are certain advantages if you choose an RD as your saving plan such as
Guaranteed Returns
The amount of interest accrued on the deposits is known at the end of tenure.
Discipline
RDs make a habit of saving regularly and assist a person in acquiring a long term financial plan such as buying a house or funding education.
Low investment requirement
You can start an RD with a small monthly investment that is available to people from every walk of life.
Safety of Investment
Since RDs are not directly related to market returns they remain one of the safest investment options especially in uncertain times.
Liquidity
Although RDs have a definite tenure the option for premature withdrawal is available. This provides some level of liquidity in case one needs money for some urgent financial purpose.
Loan against RD
You can withdraw an amount based on your balance with the bank which makes it an excellent option for borrowing funds without breaking ones savings.
Limitations of Recurring Deposits
Though it has numerous benefits recurring deposits have some drawbacks as well
Lesser Returns
Compared to any other investing platform returns on RDs are significantly less than mutual funds or even stocks.
Tax on Interest
Interest generated on RDs is taxed which decreases the effective return in reality as well.
Penalties for Missed Payments
Failure to meet the monthly deposit will attract penalties thereby decreasing the maturity amount at the time of maturity.
Penalty for Early Withdrawal
If you withdraw your RD before maturity you receive a lower rate of interest and penalty charges hence less reward if you don’t hold it until maturity.
Select a Bank or Post Office
Compare the interest rates offered by various banks and post offices before deciding on where to open the RD.
Online or Offline
You can also open an RD account online using net banking or mobile banking apps or visit the bank/post office branch and complete the formalities.
Documents Submission
You are required to furnish documents with regard to identity proof like an Aadhaar card or passport and proof of address such as utility bills etc.
Auto Debit Facility
You can also give Auto Debit instructions. In this way the monthly deposit will be debited automatically from your savings account for your convenience.
Interest Rates on Recurring Deposits
There are different interest rates on recurring deposits from various banks and tenures as well as the prevalent economic conditions. Generally the interest rates range between 4% to 7% per annum. Some banks may offer interest rates higher for senior citizens or a certain tenure.
You place a recurring deposit of ₹ 10000 every month for a tenure of 12 months at an annual interest rate of 6.5%. The maturity value can be calculated as follows
Principal ₹10000 x 12 = ₹120000
Interest Quarterly compounded interest on every deposit.
At the time of maturity the maturity amount would be higher than the principal.
Withdrawing Early and RD Loan
Premature Closure Most banks provide the facility for the pre closure of RD accounts. But in that case a penalty of premature withdrawal is charged. It generally is in the form of a reduction of interest rate which varies between 0.5% to 1% from the mutually agreedupon interest rate. In addition the interest accrued till the date of premature withdrawal will again be calculated based on savings interest rates applicable to the bank’s savings account.
Loan Against RD
In case of short term liquidity is required the amount can be withdrawn by taking a loan against the RD. Generally banks permit a loan of up to 90% of the RD amount. The interest rate for such loans is a tad higher than that of the RD.
Taxation on Recurring Deposits
The interest earned on a recurring deposit goes entirely to the tax slab of the investor. It adds to the total income of the investor in that particular financial year and is taxed accordingly. TDS for RD is not deducted this is unlike fixed deposits where the bank will deduct the TDS if interest gained exceeds ₹40000 in a single year.
Things to Note Before Opening RD
Following things to check before you open a recurring deposit account
Interest
Rate of different banks and post office interest rates.
Tenure
The tenure in which you decide to open the RD account should meet your financial goals. It can be short term or long term.
Tax Implications
Since the interest on RD is taxable consider how it will impact your net returns.
Premature Withdrawal Penalties
Most of the RD accounts have penalties for early closure of the RD.
Other Channels
Put in investment in other channels such as mutual funds SIPs or deposits that will give better returns based on one’s risk appetite.
Creative Application of Recurring Deposits
Savings under Recurring Deposits have also seen a lot of revamp over the years. RDs are now used in creative ways depending on the specific financial goals and constraints
Parental RD Accounts
A parent might open an RD on a child’s account with the objective of helping with their future school fee. This has the advantage of though the contribution may be minute each month compounded over time it will amount to a significant one at the time of college. It is fixed and thus predictable in its growth acting as a break cushion for inflation in education.
Retirement Planning RDs
While an RD is per se a product of medium term at the fag end of working lives it can indeed serve to complement retirement planning. RDs offer a low risk refuge for individuals approaching retirement who may need a sufficient appetite for risks to comfortably park their savings without exposing them to the vagaries of market linked products. Used in tandem with pension plans funds for postretirement expenses can thus be readily made available.
RDs for Wealth Preservation
Those who belong to the high networth category or possess a large wealth portfolio may employ the use of RDs not to create wealth but to protect the wealth. During times of economic downturn or decreasing interest rates RDs serve as an insurance vehicle and therefore only that percentage of the portfolio is spared from the worst instances of the market’s vagaries.
Special RD Schemes and Benefits
There are certain special RD schemes that every bank has to cater to the needs of different customers. These special schemes provide additional benefits or flexibility and sometimes offer higher returns than other schemes. Let us now see some special RD offers available in the market
As many of the banks provide RDs along with schemes related to their monthly income schemes or MIS the maturity amount from the RD could be reinvested in an MIS creating a regular source of income for the depositor. This is more beneficial for retirees or those seeking regular payouts post the RD tenure.
Variable Instalment
RDs One of the standalone products of RD offers flexible monthly instalments. The variable RD varies from normal RD in that the amount deposited is not fixed but allows the depositor to vary the monthly contribution provided they stay within a certain range. This is very helpful for those whose income may change from one month to another like freelancers or those working in gig jobs.
Tax Saver RDs
Though many RDs do not have a tax saving component a small number of banks offer such schemes with the same tax saving as fixed deposits which are exempted under Section 80C of the Income Tax Act. Only such RD schemes have longer locking periods and not all banks offer them.
The financial scenario of Recurring Deposits has changed with time. While the basic attraction of RDs still lies in their safety and fixed returns there are a number of trends and external factors governing how they can be used
Opening RD account through Fintech Platforms
The many fintech platforms introduced these days have made opening an RD account easier and hassle free. Most banks nowadays are trying to provide online RD through mobile banking applications or Internet banking portal options. The world has become technologically advanced these days and this act will definitely simplify the job of tracking deposits and facilitating monthly recurring payments along with viewing instant maturity values.
Interest Rate Cycle
RDs have an important aspect in making it an attractive investment avenue for the investor. With the interest rates rising RDs offer more attractive returns. Yet in a lowinterest rate scenario RDs are bound to lose their sheen compared to other investment avenues. In this scenario the investor should time the investment of RD with the rate cycles prevailing at the moment.
Global Perspective of RDs
Though RDs are the most prevalent in countries such as India the same products are available in a few international markets which are known as term deposits or instalment savings plans.
In economies whose financial markets are highly developed however preference usually tips toward more dynamic saving and investment products like retirement savings accounts or stock based plans. In these economies RDs are usually reserved for people with a conservative risk appetite or savings goals over short periods.
Financial Literacy and RDs
One of the less discussed elements of recurring deposits is financial literacy. Most banking and finance institutions use RDs in their campaigns for financial literacy. Here’s how
RD step one to formal savings the first RDs are often the entry point to formal banking and savings for many first time savers in rural or semi urban regions. Thus banks use RDs more as an educational tool to introduce a person to the concept of savings regularly and their need to plan financial resources for future requirements.
Understanding Compounding
Receiving RDs teaches depositors firsthand about the compounding interest phenomenon. The observance of how small monthly savings can grow with time makes people more conscious of longterm investment and disciplined saving behaviour.
Imparting Disciplined
Money to the Younger Generation RDs are often used to teach money and instil budgeting and saving habits in younger people. Parents are also seen opening RD accounts and encouraging children to save for higher savings. Small SD accounts help instil a sense of patient saving toward financial achievement.
RD as a RiskAverse Investors Tool
RDs are helpful for riskaverse investors who easily grasp that the preeminent characteristic of investment is safety and guarantee of returns. Still it does not necessarily mean that they should maximise yields based on high risk investments. With more considerable yields than those of riskier investment options RDs set in as a financial anchor in the midst of uncertainty. That is why the conservative investor finds RDs highly attractive.
Insulation from Market Fluctuations
Where with products like mutual funds or equities the adverse effects of economic or geopolitical factors are likely to be felt RD provides a guaranteed rate of return. This insulates the paper from falling market shocks and is a very safe avenue for steady income for those who do not want to expose their savings to risk.
Capital Preservation
When a person is a retiree or will retire soon this becomes an important aspect of preserving the capital. RDs fulfil this need by ensuring that the principal amount remains intact and earns more at a compounding rate. Capital preservation comes through guaranteed returns as RDs protect the principal amount first and then earn interest on the principal amount.
Short Term Goal Achievement
Risk averse investors mainly opt for RDs as they invest in the short term goals of saving. It might be tuition fees for the kid a family vacation or maybe an upcoming surgery. It makes the expected returns predictable so that the investors can plan their savings toward a particular goal better.
Recurring Deposit Vs Liquid Funds
Actually another less debated comparison is between Recurring Deposits and Liquid Funds which are the two schemes for low to moderate risk profile investors. Here’s how the two compare
Risk Factor
RDs have almost nil risk as they do not involve the stock market. Liquid funds are quite safe as compared to the entire mutual fund scheme but carry some level of risk since they invest in debt securities money market instruments and government bonds.
Liquidity and Flexibility
Liquid funds provide the best possible liquidity since the investors may withdraw their funds without attracting any charges many times in just 24 hours. RDs however attract charges for withdrawal and hence offer less flexibility than the liquid fund.
Liquid funds give higher returns than RDs primarily at any point in time when interest rates are soaring. To say the very least these returns would not be guaranteed and would vary with the performance of the underlying assets.
Conclusion
This is a recurring deposit a very good savings tool for those wanting to save with a disciplined approach but at minimal risks. It lets in the promise of guaranteed returns while allowing regular investment in small amounts over a long period. However the returns accruing from it are often lower compared to other investment avenues. Interest earned here is fully taxable.
An RD can form the core of your savings strategy if you are conservative especially when your financial goals are in sync with a fixed period such as education vacations or large scale buying. Ensure however that you don’t invest solely in RDs considering factors such as inflation liquidity requirements and generating long term wealth.