Recurring deposits are similar to term deposit in a bank. In recurring deposit, bank will open an account in your name to which you deposit a defined fixed sum every month for a specific period.
This helps people with regular income who can deposit a fixed amount every month into this scheme and get benefits of the interest rate that are applicable to fixed deposit.
Different banks have different interest rate for recurring deposit which will be credited to your account every quarter. After the maturity period, you will get a lump sum amount along with the deposited amount and interest.
You can give a standing instruction to your bank for depositing money into your recurring account from your salary saving a/c or any other a/c.
Every month before the due date, bank will take out that much money from your account and deposit it to your recurring account. Visiting your bank every month for depositing money to recurring account is not required.
How Recurring deposit can help you in your saving
When you are keeping your money in a saving account, you get only 4 to 6% interest depending on banks where you have account. If you have surplus money laying in your account and you do not have problems in future earning then you can move a portion of your regular income into recurring deposit scheme to get higher interest than the saving account i.e. within the range of 8.5 % to 9%.
Many banks like kotak have flexibility of opening a saving and recurring deposit account together by which after keeping a reasonable portion in your saving account the bank will deposit the money in recurring account to get you higher interest. You can withdraw this amount at your convenience without requesting the bank for it.
Meeting short term objective
If you are planning for a short term goal like paying education fee of your children, marriage expenses of your daughter or house renovation then start investing regularly into this scheme to get higher interest at the end of the period.
If you have build up a good amount of money to your recurring deposit account and depositing money to this account without any delay then you can approach the bank for a loan on it. Your bank based on the amount that you have in your recurring account, can give you a loan by keeping the money in recurring account as collateral security.
No doubt fixed deposit will earn you more interest than recurring deposit but if you do not have a lump sum amount to invest and wants to save a defined amount from your income every month then recurring deposit will score more for you and a better product to invest.
Nationalized banks will pay your higher interest compare to private banks and the premature penalty is less in nationalized banks. Many banks claim that they will not deduct TDS from your recurring deposit scheme but it does not mean that the interest amount is not taxable for you. Interest on recurring deposit will be taxable as your other income.