Recurring Deposits
Recurring Deposits (RDs) are a popular financial product offered by banks and non-banking financial companies (NBFCs). They enable individuals to save a fixed amount of money regularly, usually monthly, over a set period. The primary purpose is to foster disciplined savings by allowing smaller, regular deposits instead of a large lump sum. Tenure for RDs typically ranges from 6 months to 10 years, depending on the investor’s preference.
Interest Rates and Compounding:
-
- Interest rates on RDs are fixed at the time of account opening and remain constant throughout the tenure.
- These rates are generally higher than those of regular savings accounts but slightly lower than fixed deposits.
- Interest is compounded quarterly, aiding in the growth of the investment over time.
- Upon maturity, the investor receives the total amount, which includes the sum of all deposits made and the interest earned.
Overview of Recurring Deposit Rates
|
Particulars |
Details |
|
Rate of Interest |
2.50% to 8.50% |
|
Minimum Amount of Deposit |
Rs 10 (Post Office RD) |
|
Investment tenure |
6 Months to 10 Years |
|
Compounding Interest frequency |
3 Months |
|
Withdrawal prior to maturity |
Not Allowed |
|
Premature closing of RD |
Allowed with penalty |
Advantages of Recurring Deposits
Regular Saving Habits
Encourages disciplined saving by requiring monthly deposits.
Flexibility
Offers a range of tenures to suit different financial goals.
Guaranteed Returns
Fixed interest rates ensure predictable returns.
Accessibility
Low minimum deposit amounts make RDs suitable for a broad range of investors.
Premature Withdrawal and Loans
- Premature withdrawal may attract penalties and a lower interest rate than the contracted rate.
- Some banks offer loan facilities against the balance in the RD account, providing additional liquidity options.
RD Interest Rates for General and Senior Citizens
| Bank | General Public Rates | Senior Citizen Rates |
|---|---|---|
| SBI | 6.50% to 7.00% | 7.25% to 7.50% |
| ICICI | 4.75% to 7.20% | 5.25% to 7.75% |
| HDFC | 4.50% to 7.25% | 5.00% to 7.75% |
| Kotak Mahindra | 6.00% to 7.40% | 6.50% to 7.90% |
| Axis Bank | 5.75% to 7.20% | 6.25% to 7.85% |
| Bank of Baroda | 5.75% to 7.25% | 6.25% to 7.75% |
| Punjab National Bank | 6.00% to 7.25% | 6.50% to 7.75% |
| IDBI Bank | 6.25% to 7.00% | 6.75% to 7.50% |
| Canara Bank | 6.15% to 7.25% | 6.65% to 7.75% |
| Indian Bank | 4.50% to 7.25% | 5.00% to 7.75% |
| Indian Overseas Bank | 5.75% to 7.30% | 6.25% to 7.80% |
| Union Bank of India | 5.75% to 6.50% | 6.25% to 7.00% |
| Yes Bank | 6.10% to 7.75% | 6.60% to 8.25% |
| Bandhan Bank | 4.50% to 7.85% | 5.25% to 8.35% |
| Bank of India | 4.50% to 6.00% | 5.00% to 6.50% |
| Bank of Maharashtra | 5.50% to 6.25% | 6.00% to 6.75% |
| City Union Bank | 6.25% to 7.00% | 6.50% to 7.50% |
| DBS Bank | 6.00% to 7.50% | 6.50% to 8.00% |
| Dhanalakshmi Bank | 6.50% to 7.25% | 6.50% to 7.75% |
| Federal Bank | 5.75% to 7.50% | 6.25% to 8.00% |
| IndusInd Bank | 7.00% to 7.75% | 7.50% to 8.25% |
| Jammu and Kashmir Bank | 5.75% to 7.10% | 6.25% to 7.60% |
| Karnataka Bank | 5.80% to 7.40% | 6.20% to 7.90% |
| Karur Vysya Bank | 6.25% to 7.50% | 6.25% to 8.00% |
| Post Office RD Rate | 6.50% | 6.50% |
| Saraswat Bank | 7.00% to 7.50% | 7.50% to 8.00% |
| South Indian Bank | 5.00% to 7.40% | 5.50% to 7.90% |
| TMB | 6.75% to 7.75% | 7.00% to 8.25% |
RD Interest Rates of Major Banks in India
RD Interest Rates: Up to 3-Year Tenors
|
Banks |
1 year |
3 years |
|
6.80% |
6.75% |
|
|
6.70% |
7.00% |
|
|
6.60% |
7.00% |
|
|
7.10% |
7.00% |
|
|
6.70% |
7.10% |
|
|
6.85% |
7.25% |
|
|
6.75% |
7.00% |
|
|
6.80% |
6.50% |
|
|
6.75% |
NA |
|
|
6.85% |
6.80% |
|
|
6.10% |
6.25% |
|
|
6.90% |
6.50% |
|
|
6.75% |
6.50% |
|
|
7.25% |
7.25% |
|
|
7.25% |
7.25% |
|
|
6.50% |
5.75% |
|
|
6.50% |
6.50% |
|
|
6.75% |
6.50% |
|
|
6.75% |
6.50% |
|
|
7.00% |
6.50% |
|
|
7.00% |
8.00% |
|
|
6.75% |
6.50% |
|
|
6.80% |
7.00% |
|
|
7.75% |
7.25% |
|
|
7.00% |
6.25% |
|
|
7.10% |
6.50% |
|
|
7.00% |
7.00% |
|
|
6.10% |
6.25% |
|
|
7.00% |
7.10% |
|
|
6.70% |
6.70% |
|
|
7.00% |
6.50% |
|
|
6.50% |
6.30% |
|
|
Post office (5 years) |
5.50% |
5.80 % |
RD Interest Rates: Up to 5-Year & more than 5-year Tenors
|
Banks |
5 years |
More than 5 years |
|
6.50% |
6.50% |
|
|
7.00% |
6.90% |
|
|
7.00% |
7.00% |
|
|
6.20% |
6.20% |
|
|
7.00% |
7.00% |
|
|
7.25% |
6.50% |
|
|
6.50% |
6.50% |
|
|
6.50% |
6.25% |
|
|
NA |
NA |
|
|
6.70% |
6.70% |
|
|
6.25% |
6.10% |
|
|
6.50% |
6.50% |
|
|
6.50% |
NA |
|
|
7.25% |
7.00% |
|
|
5.85% |
5.85% |
|
|
5.75% |
5.75% |
|
|
6.00% |
6.00% |
|
|
6.25% |
6.25% |
|
|
6.25% |
6.25% |
|
|
6.50% |
6.50% |
|
|
7.50% |
NA |
|
|
6.60% |
6.60% |
|
|
6.60% |
6.60% |
|
|
7.25% |
7.00% |
|
|
6.00% |
6.00% |
|
|
6.50% |
5.80% |
|
|
7.00% |
6.25% |
|
|
6.10% |
6.10% |
|
|
6.00% |
6.00% |
|
|
6.50% |
6.50% |
|
|
6.20% |
6.10% |
|
|
Post office (5 years) |
6.7 % |
NA |
Calculation of Maturity Amount of a Recurring Deposit (RD)
The maturity amount of a Recurring Deposit can be calculated using the formula:
M=P×1−(1+r/n)−1/n(1+r/n)nt−1
Where:
- M = Maturity amount
- P = Monthly deposit amount
- r = Annual interest rate (in decimal form)
- n = Number of compounding periods per year (for quarterly compounding, n=4n = 4)
- t = Tenure of the deposit in years
Example: Assume you deposit ₹1,000 every month in an RD for 2 years at an annual interest rate of 6%.
- Convert the annual interest rate to a quarterly interest rate:
0.06/4=0.015r/n=0.06/4=0.015 - Calculate the total number of compounding periods:
4×2=8nt=4×2=8
- Plug the values into the formula:
M=1000×(1+0.015)8−11−(1+0.015)−1/4M=1000×1−(1+0.015)−1/4(1+0.015)8−1
- Compute
(1+0.015)8(1+0.015)8: (1+0.015)8≈1.1268(1+0.015)8≈1.1268 - Subtract 1:
1.1268−1=0.12681.1268−1=0.1268
- Next, calculate
1−(1+0.015)−1/41−(1+0.015)−1/4: (1+0.015)−1/4≈0.9963(1+0.015)−1/4≈0.9963 1−0.9963=0.00371−0.9963=0.0037 - Divide by
0.12680.0037≈34.270.00370.1268≈34.27 - Multiply by
𝑀=1000×34.27=34,270M=1000×34.27=34,270
Therefore, the correct maturity amount after 2 years with a monthly deposit of ₹1,000 at an annual interest rate of 6% compounded quarterly is approximately ₹8,453, not ₹34,270.
Tax Calculation on Recurring Deposits (RD)
The interest earned on Recurring Deposits (RDs) is taxed as ‘Income from Other Sources’ and is added to your total income for the financial year. Here’s a breakdown of how to calculate the tax:
Key Points:
- Interest Income: The interest from RDs is taxable as per the individual’s income tax slab.
- Tax Deducted at Source (TDS): Unlike fixed deposits, banks do not deduct TDS on RD interest. However, the interest income is still taxable.
Steps to Calculate Tax on RD Interest:
- Determine the total interest income from your RDs for the financial year.
- Add this interest to your other income sources to calculate the total taxable income.
- Calculate the tax liability based on your applicable income tax slab.
Example: Assume you have ₹10,000 in annual interest from RDs and fall under the 20% tax bracket.
- Total Interest Income: ₹10,000
- Total Taxable Income: ₹4,50,000 (other income) + ₹10,000 = ₹4,60,000
- Tax Calculation:
- Income up to ₹2,50,000: 0%
- Income from ₹2,50,001 to ₹4,60,000: 5% on ₹2,10,000 = ₹10,500
- Tax on ₹10,000 interest: 20% of ₹10,000 = ₹2,000
Points to Note:
- Form 15G/15H: Not required for RDs specifically, as TDS is not deducted. However, RD interest must be included in your tax return.
- Joint Accounts: Taxable in the hands of the primary account holder.
- Clubbed Income: Interest on RD in a minor’s name is clubbed with the parent’s income.
Ensure you accurately report RD interest in your tax return and consider tax-saving options if needed.
How to Open a Recurring Deposit Account
Eligibility: Any resident Indian, including minors (under parental guardianship), can open an RD account. NRIs may also be able to open RDs at some banks.
Documents Required: You will need an identity proof (such as Aadhaar Card, PAN Card, or Passport), address proof (such as utility bills, Passport, or Aadhaar Card), recent passport-sized photographs, and a PAN Card for tax purposes.
Opening Process:
- Online: Most banks allow you to open an RD account through their net banking or mobile banking apps. Log in, navigate to the RD section, and follow the steps to complete the application.
- Offline: Visit your nearest bank branch, fill out the RD application form, submit the required documents, and provide the initial deposit amount.
Benefits of Recurring Deposits (RDs)
Disciplined Savings Habit
- Regular Contributions: RDs require monthly deposits, fostering a disciplined saving habit.
- Commitment to Save: The mandatory deposits help you consistently save a portion of your income, promoting regular saving over impulsive spending.
Flexibility
- Choice of Tenure: RDs offer tenures ranging from 6 months to 10 years, allowing you to select a duration that matches your financial goals.
- Variable Deposit Amounts: Start an RD with a minimum deposit, often as low as ₹100 or ₹500, making it accessible regardless of your income level.
Assured Returns
- Fixed Interest Rate: The interest rate is set at the time of account opening and remains constant, providing predictable returns.
- Safe Investment: RDs are not affected by market fluctuations, making them a low-risk investment option.
Compounding Interest
- Quarterly Compounding: Interest is compounded quarterly, meaning interest earned each quarter is added to the principal, leading to higher returns over time.
- Growing Investment: The compounding effect increases the total maturity amount significantly over the tenure.
Financial Planning
- Goal-Based Savings: Ideal for saving towards specific goals like education, marriage, or buying a vehicle, with fixed tenure and assured returns aiding in accurate planning.
- Emergency Fund: Can serve as an emergency fund, ensuring a lump sum is available at maturity.
Tax Benefits
- Section 80TTA: Interest earned up to ₹10,000 per year is tax-exempt for individuals under Section 80TTA of the Income Tax Act.
- TDS: Interest exceeding ₹40,000 (₹50,000 for senior citizens) is subject to TDS. Submitting Form 15G/15H can help avoid TDS if your total income is below the taxable limit.
Loan Facility
- Loan Against RD: Many banks offer loans against your RD, allowing you to borrow up to 90% of the RD amount without breaking the deposit.
- Lower Interest Rates: Loans against RDs generally come with lower interest rates compared to personal loans.
Easy to Open and Operate
- Simple Process: Opening an RD account is straightforward with minimal documentation. It can be done online via net banking or mobile apps, or at a bank branch.
- Automatic Deductions: Most banks allow automatic monthly deductions from your savings account to fund your RD, making it hassle-free.
Senior Citizen Benefits
- Higher Interest Rates: Senior citizens often receive higher interest rates on RDs, making it a beneficial option for retirees.
- Special Schemes: Some banks offer special RD schemes for senior citizens with added benefits and flexibility.
Nomination Facility
- Easy Nomination: You can nominate a beneficiary for your RD account. In the event of your demise, the nominated person will receive the maturity amount, ensuring your savings benefit your loved ones.