Understanding recurring deposits for Indian savers
Recurring Deposits, or RDs, are favored by savers in India, merging flexibility with disciplined saving habits. By permitting a fixed monthly deposit into an RD account, it aids in creating a significant savings corpus over time. This article explains RDs, underscoring benefits and key features. It simplifies understanding for everyday savers, enhancing their use of this financial instrument.
The basics of recurring deposits
A Recurring Deposit (RD) is a term deposit offered by Indian banks and financial institutions. You can deposit a fixed amount monthly for a period ranging from six months to 10 years. Interest rates on RDs, between 5% and 7% per annum, are comparable to those on Fixed Deposits (FDs). They vary with the bank and the tenure selected.
Why choose recurring deposits?
One main advantage of a recurring deposit is its ability to instill financial discipline among savers. By committing to deposit a fixed sum monthly, it encourages regular savings. Recurring deposits are safe, not exposed to market risks unlike mutual funds or stocks. They are ideal for those seeking steady returns without the risk of market volatility.
Flexibility in tenure and amount
Recurring deposit accounts offer flexibility not just in terms of tenure but also in the monthly investment amount. You can start with as little as ₹100 per month. This makes it accessible even for those with limited income. Moreover, you have the liberty to choose your investment tenure. It usually ranges from six months up to 10 years, based on your long-term financial goals.
Premature withdrawal penalties
While RDs encourage saving by locking funds for a specific period, most banks allow premature withdrawal with certain penalties. These penalties vary across different banks but generally involve losing out on some interest earnings. It's important for savers to be aware of these conditions before opening an RD account. They can then plan their finances accordingly without facing unexpected losses.
Tax implications on interest earned
Interest earned on Recurring Deposits is taxable under "Income from Other Sources" at applicable income tax rates. The IRS applies TDS if interest from all deposits exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year. To avoid TDS, one can submit Form 15G or Form 15H (for seniors) if their total income is below the taxable threshold.
