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.

Source: https://recurringdepositblog.quora.com/Recurring-Deposit-%E2%80%93-An-Introduction

Now TDS will be deducted on Recurring Deposit

In the Budget for 2015 some changes have been announced regarding interest earned on Recurring Deposits.

What are Recurring Deposits? 

Recurring Deposits are a special kind of Fixed Deposits. Almost like making FDs in instalments instead of a lump sum. You can open a RD account and make periodical transfers to your RD account from your monthly income. This helps you set aside some money regularly to the RD account and earn an interest higher than a savings account.

Changes in Budget 2015 for RDs

·         TDS shall be deducted on interest income from RDs

·         TDS shall be deducted when interest income from all the branches of the Bank exceeds Rs 10,000 in a financial year. (Earlier, TDS was deducted when interest income exceeded Rs 10,000 in a financial year from one branch).

When is the change effective? 

This change is effective 1^st June 2015.

What really changes? 

Interest earned on RDs has always been fully taxable. Just like FD interest income and savings account interest income it gets added to your Income from Other Sources. Earlier there was no TDS on RD interest and now TDS shall be deducted at 10%. If you fail to provide PAN information TDS shall be deducted @ 20%.

So effectively nothing changes if you have already been offering your RD interest income for tax. Since RD interest gets added to your total income it is taxable at the slab rate applicable to you. If your total income is below the taxable limit you should submit form 15G and form 15H to the Bank and request that no TDS should be deducted. (Do note that deduction of Rs 10,000 under section 80TTA is available on interest on savings account and NOT on interest income from FDs and RDs)

What is the purpose of TDS then if nothing changes? 

When Tax is deducted at source it helps the IT department bring more and more people under the tax net. So the IT Department takes TDS deduction & defaults very seriously. Earlier some could get away with having FDs and RDs in separate branches and escape TDS if it does not aggregate to Rs 10,000. But from now on – the interest on deposits from all the branches of a bank shall be summed up to check for TDS deduction eligibility.

If you have not been adding Recurring Deposit interest income to your total income for whatever reason – there is no escaping this now!

Source: http://recurringdeposit.blog.com/2015/12/09/now-tds-will-be-deducted-on-recurring-deposit/

How Recurring Deposit Can Make You A Millionaire?

Recurring deposits has potential to make us really rich. We all want to become rich quick, and recurring deposits can help us achieve this target. I have personally gone past a rough patch in my life because of scarcity of money. Since that day I continuously try to improve my finances. Recurring deposit alone cannot make us rich.

But combination of recurring deposits and other high yielding assets can prove very profitable. Unfortunately money cannot be earned via a short-cut path. It can happen if one gets lucky and wins a lottery, but that happens only one is a billion. A simple tool like recurring deposits has power to make us a millionaire. How? We will see how to use recurring deposits to our benefit.

Recurring deposits can lift our standard of living 10-folds

Don’t worry this is not a publicity stunt. A simply savings scheme like recurring deposits can do a world of good to our finances. But if becoming rich is so simple then why not everybody become rich. The reason being that, majority people does not know how to use recurring deposits. The best thing about recurring deposit is that it accessible to all. Recurring deposits allow us to save money automatically. If we decide to save $100 each month, then this will happen automatically without us being aware of it. By the time one year is completed we will have $1,200 in your kitty. But problem is, this is where the charm of recurring deposits ends for majority of people. We must learn to take the savings of recurring deposits to next level. 

How pro investors use Recurring Deposits

Investors treat recurring deposits very differently than common men. When an investor saves $100 in recurring deposit, he uses the accumulated funds to buy assets. A pro investor will never buy liabilities from his investment linked savings. This statement is perhaps the most important statement a common man can learn to become rich. Never spend your investment linked savings to buy liabilities. Always buy assets from your recurring deposit savings. Liabilities like a car, house, etc increases your expenditure while assets adds money to our pockets. In order to become a millionaire, the faster we accumulate assets the quicker we become rich. 

Imagine an Asset as a Huge Piggy Bank

Our savings in recurring deposits shall be used to buy assets. This is why I said that recurring deposits along cannot make us rich. But if our recurring deposit savings can be used to buy assets, RD savings can make us a millionaire. Every $1 coin we add in the piggy bank corresponds to assets. A piggy bank full of one million $1 coins corresponds to a huge asset. If this piggy bank worth $1 million starts generating interest income, it will really make us financially independent. 

Recurring deposit is a very liquid asset. It is very easy to redeem recurring deposits. So it is essential to lock our savings generated from recurring deposits. Suppose we are saving Rs 20,000 each month for next 5 years. At rate of 8% per annum, our accumulate savings from recurring deposit will be Rs 14, 50,000. The ease with which these Rs 14 lakh got generated, if we do not lock this money, it will get spent with same ease. My suggestion is to buy an asset with dual purpose of locking funds and income generation. Similarly, real estate property also generates regular source of income in form of rental income. 

What can be done from Recurring Deposits Accumulated Savings?

Buying real estate property or value stocks from recurring deposit savings is a good idea. Value investors can use recurring deposit type savings to great benefits. Value investors are those categories of investors who buy stocks only when dooms day is announced in the market. When everyone is pessimistic about market, value investors go on accumulating value stocks. And when common men are buying heavily stocks, value investors stay away from market. When everyone else is buying stocks, value investor’s use only recurring deposits type savings scheme. Value stocks are great source of fixed income generation in form of dividends. 

The bottom line is: 

1. Decide how much you can save per month Rs 15,000
2. Save this money each month in a recurring deposit (RD) type scheme. It can give return @7-8% p.a.
3. After twenty years your savings will amount to Rs 14,00,000
4. Use the savings generated from (RD) to buy a asset that locks your funds and generates income.
5. If a person has several such income generating assets, for sure he/she will become a millionaire soon.

Source: http://recurringdeposit.blog.com/2015/12/05/how-recurring-deposit-can-make-you-a-millionaire/