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Benefits of Recurring Deposit scheme

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Recurring Deposit scheme is offered by almost all banks (RD schemes of SBI, PNB, ICICI Bank, HDFC Bank, IDBI Bank, Bank of India, Bank of Baroda, Corporation Bank  ) in one form or the other.  Recurring Deposit is very popular among the salaried class, specially who can afford to save only few hindered or say few thousand rupees per month.   This scheme is a boon for people who do not have a large amount of savings and thus can not use the Fixed Deposit scheme of the banks.  Under this scheme, the customer deposits a minimum amount (normally fixed) every month, and bank pays the interest at the pre-determined rates (which is usually the  same as applicable to fixed deposits ).  At the end of the period i.e. on maturity date, the customer is paid the maturity value i.e. principle deposited and the interest payable.

Calculate your maturity amount for various amounts

Start a recurring deposit to gain from high rates

By  | :With interest rates almost at their peak, it is the right time to lock your funds in good debt instruments. But what if you don't have a lump sum to invest? This is where recurring deposits come in handy. Anindya Mitra, senior vice-president , retail liabilities product group, HDFC Bank, says, "Interest rates have peaked and are likely to come down now. So, it's a good time to invest in recurring deposits at the current rates. These score over fixed deposits as you don't have to invest a large sum at one go while the interest rates are almost the same." 

How do these work? 

Recurring deposits are your SIPs in fixed deposits. The investor chooses a tenure and amount he wishes to invest every month. The interest rate fixed at the time of opening the account remains fixed for the rest of the term So, if you lock in at 9.5% for a 10-year deposit right now, you will continue to earn that high rate till the deposit matures in 2022. At the end of the tenure, you will get around 10 lakh in lump sum. 

Any individual or HUF can open a recurring deposit with a bank or post office. The minimum investment is 100 at most banks, while post offices accept even an initial amount of 10. Some banks have an upper limit of 15 lakh and the tenure varies from six months to 10 years. Senior citizens are eligible for a higher rate of interest, usually 0.5% more than that for other investors. 

Typically, a bank insists that you open a savings account with it before opting for a recurring deposit . This is because your monthly installments will be routed through this account. 

"While NRIs cannot open a recurring deposit in a post office, they can set up an account under their NRE accounts with banks or other financial institutions," says Suresh Surana, founder, RSM Astute Consulting Group. 

Keep in mind 

Experts advise that you fix the monthly installment according to your needs and affordability so that you don't miss an installment in the future. "It is important that you don't over-commit by agreeing to pay a high amount, which you may find difficult to pay later . This may lead to a default, which could result in a penalty," says Jayant Pai, CFP & head, marketing , Parag Parikh Financial Advisory Services. The penalty will depend on the monthly instalment and the number of days by which you have delayed the payment. It will be deducted from the interest that has been accrued on the deposit till then. 

If you default frequently, your account could even be shut down. "If you fail to pay the instalments on time, the bank or post office has the right to close your recurring deposit account. In such a case, the interest rate applicable to your account will be altered according to the premature withdrawal policy of the institution," says Sumeet Vaid, founder, Ffreedom Financial Planners. 

Each bank has its own policy on dealing with defaulters. HDFC Bank waits for at least 5 months before shutting down your account . The post office excuses a defaulter four times and also extends the payment period to two months, after which it will axe the account. DCB Bank does not charge a penalty, but considers an account inactive if you do not deposit any money for two years. 

You cannot opt for partial instalments . For instance, if you pay 2,000 a month, you cannot break this up in two instalments of 1,000 each. Also, you cannot pay more than the fixed amount every month. Even if a bank allows you to deposit more, the money will not earn any interest. 

If a recurring deposit gives the investor the benefit of a fixed rate, it also doesn't allow him to change the tenure. If you need the money very badly, you can withdraw after one year in case of the post office and three years for most banks. Some banks charge a penalty for premature withdrawal , so check your bank's policy before you start a deposit. 

Tax implications 

There is no tax deduction or exemption available on the amount invested. In fact, the interest earned on the amount is fully taxable . The tax has to be paid every year as it accrues even though you will get the amount on maturity. 

"In case of minors who have a joint account with their parents, the interest accrued will be clubbed with the income of the parent whose total income is higher ," says Surana. The only benefit is that tax is not deducted at source so senior citizens and those with a low income will not have to submit form 15G and form 15H to avoid TDS. For others, it means paying tax on their own. "The investor will have to pay tax on the interest income by way of advance tax or self-assessment tax," says Parizad Sirwalla, partner, KPMG India.

( Courtesy: Times of India )

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