How bank recurring deposit scheme or RD works in India

Recurring deposits or RD is a systematic investment option for Indians. Anyone interested in opening a recurring deposit account can open it by submitting required documents to the concern bank or post office.

In this article, we will let you know how to open a recurring deposit account in bank and post office, advantages and disadvantages associated to recurring deposit account, Interest rates offered for recurring deposits and at the end you will also know the tax provisions related to recurring deposits.

Before getting into all these questions and answers, let us first understand what is recurring deposits or RD in India.

recurring deposit

What is Recurring Deposit or RD

RD or recurring deposit is a very simple investment plan where the investor deposits a fixed sum of money either with the Bank or post office for a predefined period every month. In return of his investment to RD account, the investor gets interest at a pre defined rate.

How to open a Recurring deposit account

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

After choosing your bank or post office you are required to select the tenure 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 quarterly basis.

To open your recurring deposit account, you are required to have documents and recent passport size photos. You can carry one address proof, one identity proof, PAN card copy, photos and the application form to open a RD account.

Rate of Interest on recurring deposit

RD or recurring deposits offer higher interest rate compare to your investments in a saving bank account. Rate of interest in recurring deposit depends on the prevailing market rate and vary from bank to bank.

Here is a list of banks and rate of interest that they offer generally for recurring deposits;

Institutions 6 months 1 year 2 years 3 to 5 Years Above 5 years up to 10 years
ICICI Bank 7.75 8.00 9.00 8.75 8.5
HDFC Bank 8.25 8.75 8.75 8.75 8.25
SBI 7.5 9.00 9.00 9.00 9.00
BOB 7.3 9.05 9.05 9.05 9.05
Yes Bank 8.75 9.00 8.75 8.75 8.75
Kotak Mahindra Bank 8.50 8.50 8.75 8.5 8.25
PNB 7.50 9.00 9.00 9.00 9.00
Table Last Updated on: 7 the July 2014

Advantages and Disadvantage of Recurring Deposit Scheme

Now let us know the advantages and disadvantages of investing in recurring deposit scheme.

Advantages

  • Flexibility of investing minimum amount of 10 rupees
  • No TDS deducted from interest income (however, its taxable in your hand)
  • Higher interest compare to your saving account interest rate
  • Low risk
  • Loan can be available by keeping your amount in recurring deposit 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.
  • After taking recurring deposit, you cannot change the monthly investment amount

Interest earned on recurring deposit investments are chargeable to income tax at the normal tax rate that is applicable to 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.

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 on recurring deposits.

If you are looking for a periodical and systematic investment plan then recurring deposit or RD is the best investment option for you. If you are a risk taker then you can also invest in SIP scheme of mutual funds to have a higher return.

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