Recurring Deposit – An Introduction

Recurring Deposit is a special kind of deposit product offered by banks and post offices in India.

In a recurring deposit a person invests a fixed amount every month for a specified duration. At the end, he gets back his investment and interest accrued.

A recurring deposit earns interest at same rates as a fixed deposit. Money invested in a recurring deposit account earns compound interest on a quarterly basis. Interest is paid only on maturity.

When is Recurring Deposit Useful?

If one has financial goals for the future but can afford to invest small amounts only, a recurring deposit is an ideal product. If however, one has idle cash and wants to invest for a financial goal, a fixed deposit would be a better option as compared to a recurring deposit.

Senior citizens get higher rates, similar to Fixed Deposit rates for senior citizens.

A recurring deposit is a safe financial product and offers reasonably good returns.

Illustration of Recurring Deposit

Let us take an example.

Mr Seedharaman is 30 years old married person and want to save around Rs 5 lakhs.

Unfortunately he does not have the full amount right now. He can however invest and save a fixed but small amount every month.

He can open a recurring deposit account for 5 years and invest Rs 7000 per month.

Every year Mr Seedharaman will be able to save Rs 84,000. After 5 years he will have a corpus of Rs 420,000, plus interest income over these 5 years.

Assuming an interest rate of 8.2%, Mr Seedharaman will end up with Rs 519,785. Of this:

  • Rs 420,000 is his investment over the past 5 years and,
  • Rs 99,785 is his interest income earned over the past 5 years.

Hypothetically, if Mr Seedharam wants to reach exactly Rs 500,000 (5 lakhs) in 5 years at an interest rate of 8.2%, he has to invest exactly Rs 6734 per month. However, practically that is not possible as banks encourage recurring deposits in multiples of Rs 500.

A senior citizen investing Rs 7000 per month for 5 years will make Rs 526,742 as he gets a higher interest rate of 8.7%

I have use this calculator from HDFC Bank for the above illustration.

Taxation of Recurring Deposit

Tax Deducted at Source ( TDS ) is applicable on a recurring deposit.

If a person has only 1 recurring deposit as his investment and interest earned on a recurring deposit is more than Rs. 10,000, tax will be deducted at 10 per cent by the bank.

In general, TDS will be deducted when interest income on Recurring Deposit and Fixed Deposit of a customer across all branches, exceeds Rs.10000 in a year.

Income tax is to be paid on interest earned from a Recurring Deposit at the rate of tax slab of the investor.

To prevent TDS, investors with no taxable income will have to submit Form 15G to the bank within first week of April every year. Senior Citizens will have to submit a form 15H to bank to avoid TDS, within first week of April every year.

Benefits of a Recurring Deposit

  1. It regularizes savings.
  2. Encourages savings habit.
  3. It helps to build a big corpus.
  4. Recurring deposit helps to secure financial future.
  5. It helps one’s liquidity needs as one does not need to invest all his money.
  6. It is one of the best investing options for new investors who are just starting their careers.
  7. Recurring deposit is helpful in planning short term goals, between 1 to 3 years.

Final Words

A recurring deposit is a basic saving plan which can help a person to regulate his savings. It is a safe investment that guarantees good returns.

I hope you found this article on recurring deposits useful. If you have any comments please feel free to contact me. Before making any investment decision, please contact your financial adviser.

I have provided this article for educational purpose only.

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References

NDTV – Recurring Deposits now to attract TDS.
Bank of India – Recurring Deposit
HDFC Bank – Recurring Deposit
Yahoo – Fixed Deposit versus Recurring Deposit

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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