Are you seeking a responsible approach to saving money in India? Have you heard of recurring deposits (RDs) and wondered how they may help you reach your financial goals? A recurring deposit (RD) is a common savings system given by banks and post offices that allows you to deposit a certain amount of money every month and receive interest on it. It’s a practical option for individuals who wish to accumulate a large savings fund over time without taking on considerable risks. Let’s look at the characteristics, benefits, and workings of a Recurring Deposit to see why it’s a popular option among savers.
Features and benefits of recurring deposits
Regular savings habit
One of the primary features of a recurring deposit (RD) is the requirement to deposit a fixed amount regularly, usually monthly. This discipline makes it easier to cultivate the culture of saving as well as build up a large amount of cash over the long term.
Fixed interest rate
RD accounts have a fixed rate of interest that is declared at the time of opening the account. This fixed rate means that there is certainty in the interest to be earned on the deposit for the agreed tenure without fluctuation.
Flexible tenure
Recurring Deposits offer flexible tenures of 6 months to 10 years. You can select a tenure that best suits your financial needs and can range from short-term savings or long-term financial planning.
Low minimum deposit
RD accounts are characterised by low minimum deposit balances, which makes them available to all savers. The minimum amount to be deposited can be as low as ₹100 per month to enable all classes of people to participate in the scheme.
Guaranteed returns
In contrast to other investments that are linked to the market, RDs provide a fixed rate of return. The fixed interest rate means that you are guaranteed to receive a certain amount after the agreed-upon period, making it a relatively safe investment.
Premature withdrawal facility
Though RDs are intended for systematic savings, they do allow for premature withdrawal. This may attract a penalty or a lower interest rate, but it is important to have cash when the need arises and not have all the money locked up.
Loan against RD
Most of the banks allow you to avail a loan against your RD account. This feature enables one to withdraw cash from the RD without compromising the plan while offering flexibility in case of emergencies.
Tax implications
The interest earned on RD is fully taxable according to your income tax slab. Nevertheless, the disciplined savings and the guaranteed returns override the tax aspect, thus making the plan more attractive to conservative investors.
Ease of opening and management
It is easy to open an RD account and one can do so through the internet or at any branch of the bank. Also, the account can be operated through net banking or mobile banking, which makes it flexible for the account holders.
Comparison with National Savings Certificate (NSC)
Though both RD and NSC are safe instruments for investment, RDs are preferable because of the monthly regularity of investment and flexible tenure. NSC, on the other hand, is a one-time investment with a fixed tenure of 5 or 10 years. Based on your savings behaviour and objectives, there is a saving option that you can select depending on your preference.
How recurring deposits work
Opening an RD account
To begin an RD, one has to approach a bank or post office and open an RD account. In this case, you can decide on the tenure you want and the amount you wish to deposit every month. The rate of interest is determined at the time of opening the account and does not change afterwards.
Monthly deposits
After creating the account, you are expected to make a fixed amount of money every month in the account. It can be done either through standing instructions to debit your savings account or through depositing the amount in person every month. It is also important to note that failure to make a monthly deposit may be penalized.
Interest calculation
Interest on RD is charged on a compounded quarterly basis. This means that the interest earned in one quarter is added to the principal, and interest is calculated on the new principal in the next quarter. The compounding effect assists in making your savings grow at a faster rate in the long run.
Maturity and payout
At the end of the chosen tenure, the RD matures, and you get the maturity amount along with the interest earned on the principal amount. The maturity amount is paid to your savings account, which means that you receive a lump sum that you can use to achieve your financial objectives.
Premature withdrawal
If you need to withdraw the amount before the RD matures, you can do so, but it may come with penalties or a reduced interest rate. This facility is useful in ensuring that the company has adequate funds to cater for any emergency, although it is always advisable to avoid early withdrawal to increase the amount of money earned.
Loan facility
Most banks provide the facility to convert your RD into a loan. This loan can be up to 90% of the RD amount and does not require the breakdown of the RD. The loan interest rate is somewhat lower than personal loan rates, which means that borrowers can get the necessary amount quickly and at a relatively low cost.
Conclusion
A Recurring Deposit (RD) is an ideal savings strategy for anyone wishing to develop a disciplined savings habit while earning guaranteed returns. It offers both security and convenience with features like stable interest rates, variable tenures, cheap minimum deposits, and the ability to withdraw funds prematurely and borrow against RD. Understanding how RDs function, from opening an account and making monthly payments to calculating interest and maturity, allows you to make more educated decisions and optimise your savings. Whether you are comparing it with other investment options like the national savings certificate (NSC) or simply looking for a low-risk way to save, an RD is a reliable and straightforward choice for achieving your financial goals in India.