Is bank recurring deposit a good investment option for you

In recurring deposit, bank will open an account on your request to which you deposit a defined fixed amount every month for a specific period of time. In return of your investment to RD account, you get interest at a predefined rate.Therefore, its known as a systematic investment plan in India.

This type of investment scheme helps retail investors who has regular income and prefer to deposit money every month instead of depositing a large lump sum amount for a fixed period of time. After the maturity period, you will get a lump sum amount along with the deposited amount and interest. Different banks have different interest rate for recurring deposit schemes. 

You can give a standing instruction to your bank or post office to deposit money into your recurring account from your salary saving account or any other account. Based on your request, bank will take out your monthly investment amount from saving account to recurring account.

Where to open recurring deposit account and Interest rates

All banks and post offices offer recurring deposit facility. You need to select the most convenient bank or post office.  While selecting we suggest you to look into certain factors like interest rates, convenience in operating, online deposit facility and any other personal requirements.

After choosing your bank or post office you are required to select the tenure based on your goal for which you want to keep investing and the amount that you need to invest. Depending on your bank, you can invest for a minimum period of 6 months and up to a maximum period of 10 years.

If you are not withdrawing after maturity, then it will continue to have interest up to a period of 5 years even though you have not contributed anything to your recurring deposit account.

Interest to your recurring deposit account will be credited on a quarterly basis.

To open your recurring deposit account, you can carry one address proof, one identity proof, PAN card copy, photos and the application form.

RD or recurring deposits offer higher interest rate compare to investments in a saving bank account.Rate of interest in recurring deposit depends on the prevailing market rate and vary from bank to bank. We suggest you to check the rate of interest with all banks before investing.

How Recurring deposit can help you in your goal

When you are keep your money in a saving account, you get only 4 to 5% interest depending on the bank where you open your 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 6.5 % to 7.5%.

Many banks like kotak Bank, HDFC and ICICI have flexibility of opening linked saving and recurring deposit account in which after a reasonable balance in your saving account, the bank will automatically deposit the excess money in to the recurring account to get you higher interest. You have flexibility to withdraw amount from your saving account at your convenience without requesting the bank.

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.

You also have mutual fund SIP schemes to get the target amount for your goal. However, stocks market investing comes with market risk. Therefore, if you are not a risk taker, then we suggest you to avoid stock market investing. If you are a risk taker, then we suggest you to invest in SIP scheme of mutual funds for higher return.

Advantages and Disadvantage of Recurring Deposit Scheme

If you have build up a good amount of money in your recurring deposit account, then you can approach the bank for a loan against the money in RD. Your bank based on the amount that you have in your recurring deposit account, can give you a loan by keeping the money in recurring account as security. Apart from loan facility you also have certain other advantages of investing in RD.

Below we have listed few major advantges and disadvantages of investing in recurring deposit scheme.

Advantages

  • No TDS deducted from interest income
  • Higher interest compare to your saving account interest rate
  • Low risk
  • Loan can be availed by keeping your amount in RD account as security

Disadvantage

  • Even though TDS is not deducted by the bank or post office, you are liable to pay tax on the interest amount earned on your recurring deposit investments. Interest earned on recurring deposit investments are chargeable to income tax at the normal tax rate that is applicable to a tax payer. At the year end, you are required to include interest amount under the head income from other sources while filling your tax return.
  • After investing, you cannot change the monthly investment amount. You have to open a new RD account by closing the old one.

If you are an employee, then to avoid higher tax at the end of the year, we suggest you to declare your interest on recurring deposit to your employer. Bank and post offices are not required to deduct TDS from your interest income on RD.

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 regular 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.

Remember, 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.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.