What is Recurring Deposit Account?
A Recurring Deposit (RD) account is a term-deposit savings product offered by banks and financial institutions in India. Unlike a traditional fixed deposit where you deposit a lump sum amount, in an RD account, you contribute a fixed sum of money at regular intervals (usually monthly) over a pre-determined tenure.
At the end of the tenure, you receive the maturity amount, which consists of your total contributions plus the interest earned. The concept encourages disciplined savings by allowing account holders to set aside small amounts periodically, making it easier for individuals especially those earning a fixed monthly income to save consistently and earn higher interest than a regular savings account.
Benefits of Recurring Deposit Account
Disciplined Savings Habit:
By mandating a fixed monthly deposit, RDs promote a structured saving routine. This discipline helps individuals accumulate a significant corpus over time without feeling the pinch of saving a large lump sum.
Attractive Interest Rates:
Banks and post offices often offer interest rates on RDs that are higher than savings account rates. While rates change periodically based on reserve bank guidelines and individual bank policies, RD rates typically range between 5% to 7% per annum (p.a.), depending on tenure and type of account.
Flexible Tenure Options:
RD tenures in India usually start from six months and can go up to ten years. Such flexibility allows savers to choose a tenure that aligns with their financial goals whether short-term (e.g., saving for a vacation) or long-term (e.g., building a corpus for a future expense).
Low Minimum Deposit Requirement:
Most banks permit opening an RD account with a low monthly installment often as low as ₹100. This low barrier to entry makes RDs accessible to people from all economic backgrounds, including students, homemakers, and low-income earners.
Loan Against RD:
If you need funds before maturity, you can take a loan or overdraft against the RD at a relatively low interest rate. The bank keeps your RD as collateral and usually offers a loan amount up to 90% of the RD’s value.
Safe and Secure Investment:
Since RD accounts are backed by scheduled banks or the government (in the case of Post Office RDs), they carry virtually no credit risk. This safety makes RDs a favored option for risk-averse savers who prefer guaranteed returns.
Premature Withdrawal Option:
Although premature withdrawal often attracts a penalty (usually a small percentage of the interest), it is still possible to break an RD before its tenure ends. This facility provides liquidity in case of emergencies.
Features of Recurring Deposit Account
- Fixed Monthly Installment (EMI-like Commitment): When you open an RD, you select a certain monthly deposit amount (e.g., ₹1,000). You must deposit this exact amount every month until maturity. Failure to do so can lead to penalties or discontinuation of the account.
- Pre-Determined Tenure: You choose the tenure upfront common options are 6 months, 1 year, 2 years, 5 years, and so on. The RD locks in the duration, and you earn the interest rate fixed for that tenure at the time of opening.
- Interest Compounded Quarterly: In most banks, interest on RD is calculated quarterly and compounded every three months. This compounding effect helps your savings grow at a faster pace, as you earn interest not only on the principal but also on the accumulated interest.
- Automatic Renewal: Some banks offer an automatic renewal facility upon maturity. If chosen, the matured amount is reinvested at the prevailing interest rate for the same tenure, ensuring continuous growth without manual intervention.
- Nomination Facility: Like most deposit accounts, an RD account allows you to nominate a beneficiary. In the unfortunate event of the account holder’s demise, the nominee can claim the RD proceeds without legal hassles.
- KYC Compliance: To open an RD, you must complete Know Your Customer (KYC) formalities. This typically involves submitting identity proof (e.g., Aadhaar or PAN card) and address proof (e.g., utility bill, Voter ID) along with a photograph.
- Penalty for Missed Installments: If you skip or delay an installment, banks usually levy a nominal penalty (for instance, ₹5 to ₹25 per missed installment). Some banks permit you to make up for missed installments within a certain grace period; otherwise, the account could be classified as discontinued.
- No Risk of Market Fluctuations: Since RD is a fixed-income product, the returns are fixed (once your RD is active). You are not exposed to market volatility, unlike equities or mutual funds.
Types of Recurring Deposit Account in India
Regular RD:
This is the standard RD product where you choose a fixed monthly installment and deposit it regularly. Interest rates vary with tenor longer tenors generally fetch slightly higher rates.
Senior Citizen RD:
To encourage retirement savings, many banks offer a higher interest rate (usually 0.25%-0.50% extra) for customers aged 60 and above. Other features remain like a regular RD.
Tax-Saving RD:
Certain banks provide RDs that qualify for tax deductions under Section 80C of the Income Tax Act, 1961. These RDs have a lock-in period of five years and permit deductions up to ₹1.5 lakh in a financial year. Premature withdrawal is typically not allowed in tax-saving RDs.
Flexi RD (Sweep-in RD):
In a Flexi RD, your surplus balance in a savings or current account is automatically transferred to a margin RD linked to your account. This allows idle funds to earn higher interest, while you can still access your money as needed. Interest rates are often like those of regular RDs.
Corporate RD:
This type of RD is offered to corporate employees under tie-ups between companies and banks. Employers often deduct the monthly RD installment directly from the employee’s salary. Interest rates and tenures are like regular RDs, but they encourage employees to save through payroll.
Specialized RDs (Co-branded or Promotional Offers):
Periodically, banks partner with specific organizations, schemes, or festivals (e.g., Diwali offers) to launch promotional RDs with slightly higher interest rates for a limited duration. These promotional RDs usually have short tenures (9-18 months).
How Does Recurring Deposit Account Work?
Account Opening & Deposit Commitment:
- Choose a bank or post office and complete KYC formalities.
- Decide on a monthly deposit amount (e.g., ₹500, ₹1,000, or more).
- Select a tenure (6 months, 1 year, 2 years, etc.).
- Sign an RD agreement and authorize the bank to debit your account or accept post-dated cheques/standing instructions for monthly contributions.
Monthly Deposits (EMIs):
Every month, typically on a fixed date, you deposit the installment. This can be through:
- Standing Instructions (SI) from your savings account
- Auto-debit mandate via net banking
- Post-dated cheques (if offered by the bank)
- Cash or cheque at the branch counter
If you miss a deposit, the bank charges a nominal penalty. Some banks offer a grace period (often 15 days) to make up for missed payments; otherwise, your account could be discontinued, and you may lose out on interest benefits.
Interest Calculation:
Banks calculate interest quarterly, based on the balance in your RD.
For example, if you deposit ₹1,000 every month for a 1-year RD at 6.75% p.a., your quarterly balances will vary (₹3,000 in Q1, ₹6,000 in Q2, ₹9,000 in Q3, and ₹12,000 in Q4), and interest is computed on these amounts for that quarter.
The compounding effect ensures that interest earned in one quarter forms part of the balance for the next quarter’s interest calculation.
Maturity & Payout:
At the end of the chosen tenure, your RD matures automatically.
The bank pays you the maturity amount, which equals:
Total Deposits (Monthly Installment × Number of Months)
+ Total Interest Earned (compounded quarterly)
You receive the proceeds via a cheque or direct credit to your savings account. Some banks also offer the option to renew the RD at prevailing rates.
Premature Withdrawal or Loan Against RD:
If you need money before maturity, you can request premature withdrawal. Banks typically allow this after a minimum lock-in (e.g., 3 months) but charge a penalty often by reducing the applicable interest rate by 0.5% to 1%.
Alternatively, you can avail a loan/overdraft against your RD (usually up to 90% of the RD’s value). The loan interest rate is slightly higher than the RD’s rate but still lower than personal loan rates. Once you repay the loan, the RD continues until its original maturity date.
List of Documents Required to Open Recurring Deposit Account in India
To open an RD account in India, you must complete the bank’s KYC process. The required documents typically include:
Identity Proof (Any One of the Following):
- Aadhaar Card (UID)
- Permanent Account Number (PAN) Card
- Voter ID Card
- Passport
- Driving License
- Government-issued Identity Card (e.g., NREGA Card, Identity Certificate)
Address Proof (Any One of the Following):
- Aadhaar Card (if it has your current address)
- Passport (if current address is printed)
- Driving License (if current address is printed)
- Utility Bills (Electricity Bill, Telephone Bill, Water Bill) not older than 3 months
- Bank Statement or Passbook with recent address proof
- Rental Agreement (registered with local authorities)
- Voter ID (if address is current)
Note: Some banks accept a single document as both identity and address proof if it contains your name, photograph, and current address (for example, an Aadhaar card).
Passport-Size Photographs:
Generally, two recent color photographs (size 2”×2”) are required.
Proof of Income (If Requesting Higher Deposit Amounts or Special Rates):
In most cases, for a standard RD, income proof is not mandatory. However, if you wish to open a high-value RD (above certain bank-specified thresholds) or seek special promotional rates, you might need to submit:
- Salary Slip (for salaried individuals)
- Form 16 (Income Tax Certificate)
- ITR Acknowledgement or latest Income Tax Return
- Business Registration Proof (for self-employed)
Passport-sized Photograph of the Nominee (If Applicable):
While banks allow nomination in RDs, a photograph of the nominee may be optional. Always confirm with the bank for their specific requirements.
Existing Savings/Current Account Details:
To set up standing instructions or auto-debit, you need to provide details of your existing savings or current account where the monthly installment will be deducted.
Signature Proof:
Your signature (on application forms, mandate forms, and in the bank’s records) is cross-verified. Ensure your specimen signature matches across all documents.