One of the first steps in building your wealth is having a well-thought-out savings plan. This requires choosing the right savings option, such as a Recurring Deposit (RD).  It allows individuals to build their savings gradually by depositing a fixed amount each month while earning interest on their investment. In this article, we cover what an RD account is, how it works and steps to open an RD account online or offline.

Meaning of Recurring Deposit

A Recurring Deposit (RD) is a type of deposit account provided by the bank, which allows account holders to deposit a fixed amount of money at regular intervals for a specific period. This helps individuals stay disciplined with their savings while earning interest on the deposited funds. This is the preferred option if you don’t have a lump sum amount to start with. By depositing small amounts consistently, account holders can accumulate wealth over time.

How does a Recurring Deposit work?

A recurring deposit grows your wealth through quarterly compounded interest.  It is a structured savings facility that enables you to set aside a fixed amount of money every month for a chosen term. Here’s a detailed overview of how recurring deposits work:

  • Setup: You agree to set a monthly deposit amount and a specific tenure with your bank.
  • Auto-debit: Generally, banks deduct the instalment amount directly from your linked savings account on a set date every month.
  • Compounding Interest: The interest rate is fixed when you open the account. Every quarter, the bank calculates interest on the accumulated balance and adds it to your principal amount.
  • Maturity: Once the tenure is complete, you receive the total principal you invested plus all the accumulated interest in one lump sum.

Features of Recurring Deposit

The features that make recurring deposits a distinctive savings and investment option are:

  • Guaranteed Returns

A recurring deposit is a fixed – income security that offers fixed and stable returns to depositors at the time of maturity. Since the interest rate is unaffected by market conditions or other external factors, investors can determine how much income they will earn.

  • Deposit Amount

The amount to open a Recurring Deposit account is different for each bank. A recurring deposit allows individuals to start saving with a modest amount instead of committing to a lump-sum investment. However, RDs are also suitable if investors want to deposit a sizable amount.

  • Flexible Tenure

Many banks offer flexible tenures for their RDs, and an investor can choose either a long- or short-term RD investment, aligning it with their financial goals. This flexibility is useful for planning any major expenses in the future or wealth growth.

  • High – yielding Interest

When compared to a regular savings account, an RD offers higher interest rates. Interest on a recurring deposit is calculated every three months, allowing your savings to grow steadily and earn higher returns over the deposit tenure. Many banks also offer higher interest rates to senior citizens. You can also accelerate your wealth growth by combining a high bank savings interest rate with your RD account.

  • Loan Facility

Investors can also borrow a loan against their RD balance (generally up to 90 to 95% of the accumulated deposit) without closing the account.

  • Premature Withdrawal

Withdrawing from a recurring deposit (RD) before maturity is allowed; banks deduct a penalty on the interest rate. This also affects the total earnings you would receive, since the interest rate will be adjusted for the exact period, your RD was active.

Factors to Consider Before Applying for RD

If you are applying for an RD account, there are some important factors to consider ensuring you make an informed decision:

  1. Investment Period:  The tenure of the RD investment can range from 6 months to 10 years. While shorter deposit periods offer greater liquidity, longer tenures generally provide higher returns. Choose a tenure that aligns with your financial goals.
  2. Interest Rate: The interest rate on RDs varies between banks and is influenced by the tenure of the deposit. You can use an RD calculator to estimate how much interest you will earn based on the tenure and interest rate.
  3. Penalty for Premature Withdrawal: Most RDs have a penalty that is applicable when the amount is withdrawn before maturity. It is important to know the terms and the percentage of penalty charged, as it can affect the actual returns.
  4. Frequency of Deposits: RDs offer regular deposits that can be made on a monthly, quarterly, or annual basis. You can choose the frequency of deposit that aligns with your financial situation.
  5. Tax Implications: The interest earned on RDs is taxable, and it is important to consider the taxation on the returns. Only the interest earned is taxable, not the principal amount. The Tax Deducted at Source (TDS) on RD is only applicable if the interest is more than INR 40,000.

How to open an RD online

Opening an RD account online is a quick way to start your investment with zero physical paperwork. Here’s a step-by-step guide to opening an RD online:

Step 1: On your bank’s mobile application or website portal, locate a section labelled as Deposits, Accounts, or Investments and select ‘Open Recurring Deposit’.

Step 2: Enter the details such as the specific amount you will be investing monthly and the preferred tenure.

Step 3: Choose the savings or current account that will be used for the automatic monthly deposit.

Step 4: Provide nominee details to secure the funds.

Step 5:  Submit the application by verifying with your transaction PIN or OTP, and your RD account will be activated instantly.

How to open an RD offline

You can also open a Recurring Deposit (RD) offline, visit your nearest bank or post office branch. Here’s the process of opening an RD account offline:

Step 1: Gather the required documents such as Aadhaar, PAN and existing bank details.

Step 2:  At your bank branch, request a Recurring Deposit (RD) Application Form.

Step 3: After submitting the application form and documents, you will be required to pay the first instalment.

Step 4: Once the bank processes your form, they will hand you an RD receipt or an updated passbook containing your new account details.

Conclusion

Recurring Deposits (RD) are a popular investment option for individuals. It offers an easy and stable way to invest small amounts of funds regularly. When you open a savings account, you also get access to open an RD account with the same bank. It is important to consider the investment period, interest rate, tax implications and penalties for premature withdrawals to ensure this investment aligns with your financial needs and goals.