What is Recurring Deposit (RD) and How Does It Work, Types, Components, Benefits, Features, and Uses

What is Recurring Deposit (RD)?

A Recurring Deposit (RD) is a financial product offered by banks and post offices in India that allows individuals to save a fixed amount every month. Instead of depositing a large sum at once, the depositor contributes a predetermined sum monthly for a chosen tenure, which can range from six months to ten years. At the end of the maturity period, the depositor receives the total amount deposited along with interest earned. RDs encourage disciplined savings by requiring regular deposits, making them a popular choice for salaried individuals, students, and homemakers who wish to accumulate a lump sum over time.

How Does Recurring Deposit Work?

When you open an RD account, you select the monthly deposit amount and the tenure. For example, if you choose to deposit ₹2,000 every month for two years, you will make 24 deposits. Each time you deposit, that amount starts earning interest at the prevailing RD rate. Interest in RDs is compounded quarterly, meaning that every three months, the bank calculates interest on the amount accumulated so far and adds it to the principal. At maturity, you receive the sum of all monthly deposits plus the interest earned over the chosen tenure. The formula used by banks to calculate the maturity amount accounts for monthly installments, the interest rate, and compounding frequency.

Components of Recurring Deposit (RD)

• Monthly Installment (Deposit Amount): This is the fixed sum you choose to deposit every month. It can be as low as ₹100 in many banks, though some banks may have higher minimum requirements.
• Tenure (Term): The duration for which you commit to making monthly deposits. RDs typically offer tenures from six months up to ten years. You earn higher interest rates for longer tenures in most cases.
• Interest Rate: The rate at which the bank pays interest on the RD amount. Interest rates vary across banks and may change from time to time based on the Reserve Bank of India’s (RBI) guidelines and market conditions. Generally, senior citizens receive a slightly higher interest rate on RDs.
• Maturity Amount: This is the total amount you receive at the end of the RD term. It includes all the monthly installments and the interest earned. Banks often provide a RD maturity calculator on their website to help customers estimate this amount.
• Nominee: You can nominate a family member or another individual to receive the RD proceeds in case of your demise during the tenure. A nominee offers financial security for your loved ones.

Types of Recurring Deposit (RD)

• Regular RD: This is the standard RD offered by most banks. You choose a fixed monthly installment and a tenure. Once set, the installment and tenure cannot be changed.
• Flexi RD: Some banks offer a Flexi RD where you can adjust the monthly deposit amount within a predefined range and partially withdraw funds before maturity under certain conditions. Flexi RDs provide more flexibility but may come with slightly lower interest rates compared to regular RDs.
• Tax-Saving RD: A few banks and post offices offer tax-saving RDs under Section 80C of the Income Tax Act, 1961. The lock-in period for these RDs is typically five years, and deposits up to ₹1.5 lakh in a financial year qualify for a tax deduction. Interest earned is taxable as per the depositor’s tax slab.
• Senior Citizen RD: These RDs are designed for individuals aged 60 years and above. They offer a higher interest rate typically 0.25% to 0.50% more than the regular RD rate. Other features remain like regular RDs.

Feature of Recurring Deposit (RD)

• Fixed Returns: The interest rate is fixed at the time of opening the RD, which means you know in advance how much you will get at maturity.
• Low Minimum Deposit: Most banks allow you to start an RD with a small monthly installment, often as low as ₹100.
• Quarterly Compounding: Interest is compounded quarterly, which leads to higher overall returns compared to simple interest schemes.
• Automatic Debit Facility: Many banks offer an auto-debit feature from your savings account or linked account, ensuring timely and hassle-free monthly deposits.
• Premature Withdrawal: You can close the RD prematurely after a minimum lock-in period (usually six months), but you may have to pay a penalty and will earn interest at a lower rate.
• Loan Against RD: You can avail a loan of up to 90% of the RD maturity value from the bank. The interest rate on such loans is typically lower than personal loans, making RD collateral loans a cheaper option.

Benefits of Recurring Deposit (RD)

• Disciplined Savings: RDs help individuals build a habit of regular saving, making it easier to plan for future expenses like education, vacation, or emergency funds.
• Predictable Returns: Since the interest rate is fixed at the start, there is no uncertainty about returns, unlike market-linked investments.
• Flexible Tenure: You can choose a tenure that matches your financial goal short-term or long-term making RDs suitable for various life objectives.
• Safety: RDs in scheduled commercial banks and post offices are considered very safe. Deposits up to ₹5 lakh per depositor per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Loan Facility: The option to take a loan against the RD provides liquidity in case of unexpected expenses, without breaking the RD prematurely.
• No Market Risk: As a fixed-income product, RDs are not affected by market fluctuations, making them ideal for risk-averse investors.

Uses of Recurring Deposit (RD)

• Education Plan: Parents can open an RD to save for their child’s future education expenses. The disciplined approach ensures funds accumulate over a fixed timeframe.
• Wedding Fund: Young professionals can start an RD early to build a corpus for wedding expenses without feeling a burden on their monthly earnings.
• Emergency Fund: RDs can serve as an emergency fund if you choose a shorter tenure. You know exactly how much you will receive and when.
• Vacation Savings: Saving monthly in an RD can help plan for vacations or family trips, making it financially manageable.
• Gifting Purpose: Some people open RDs with a nominal amount as a gift for children or grandchildren, which matures on a pre-decided date, like their 18th birthday.

Who Should Invest in RD?

• Salaried Individuals: People with steady monthly income find RD convenient, as a fixed amount is automatically deducted from their bank account.
• Students: Even small monthly deposits can accumulate over the years, helping students build savings before stepping into professional life.
• Low-Risk Investors: Those who prefer safety over higher returns of riskier assets like stocks or mutual funds.
• First-Time Investors: Beginners in the world of investments can start with RDs to understand disciplined savings and fixed-income instruments.
• Senior Citizens: With slightly higher interest rates available, senior citizens looking for stable returns can benefit from RDs.

Taxability on Recurring Deposit (RD) in India

Interest Earned: Interest earned on RD is taxable as per the investor’s income tax slab. Banks deduct Tax Deducted at Source (TDS) at 10% if the total interest in a financial year exceeds ₹40,000 (₹50,000 for senior citizens). If you do not have a PAN linked to your bank account, TDS is deducted at 20%.

Form 15G/15H: If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank to avoid TDS deduction. However, you must still declare the interest earned and pay any applicable tax on it when filing the income tax return.

Tax-Saving RD: Under Section 80C, deposits made in Tax-Saving RDs qualify for deduction up to ₹1.5 lakh per financial year. Note that the interest earned on these RDs is fully taxable.

How to Apply for a Recurring Deposit (RD)?

• Choose the Bank or Post Office: Compare RD interest rates and other terms offered by different banks and post offices. Many banks also provide detailed RD calculators on their websites to estimate maturity amounts.
• Visit Branch or Apply Online: You can visit the bank/post office branch to fill out the RD account opening form. Most major banks also offer online application through net banking or mobile banking apps.
• Submit Documents: Provide identity proof (such as Aadhaar card, passport, or driver’s license), address proof (such as utility bills or Aadhaar), and a passport-size photograph. If you apply online, you may need to upload scanned copies.
• Select Deposit Amount and Tenure: Decide how much you want to deposit every month and for how long. Check the bank’s minimum and maximum deposit limits.
• Link Savings Account: For auto-debit facility, link your RD to a savings account. This ensures timely monthly deduction without manual intervention.
• Nominee Declaration: Provide nominee details so that the proceeds go to the nominee in case of unfortunate events.
• Deposit First Installment: Make the first deposit either in cash (if opening in branch) or via net banking if applying online. If auto-debit is chosen, ensure sufficient balance in the linked savings account.
• Receive RD Passbook or Receipt: The bank or post office issues an RD passbook or receipt containing details like RD account number, installment amount, tenure, interest rate, and maturity date. Maintain this document carefully for future reference.