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.