A recurring deposit (RD) may seem like a lacklustre investment avenue, but it could be a valuable tool for reaching your financial goals. It is a safe way to make regular monthly investments and earn assured returns. Instead of letting your monthly surplus idle in your savings bank account, shift it to an RD.
Compared to a savings bank, you earn a higher interest rate that is equivalent to a fixed deposit of the same duration in most cases.
Bank RD returns are around 9 per cent currently across most tenors (between one and ten years), while NBFCs such as DHFL offer rates at a higher 10 per cent across most RDs. Although the post office offers RDs as well, the rates are less attractive, at 8.4 per cent currently.
RDs are an ideal choice when your investment horizon is short. For example, say you want to buy a fridge in a year’s time, or you want to save for your insurance premiums due next year.
A one-year RD with a monthly payment requirement may be suitable for this purpose. City Union Bank offers the best interest rate of 9.25 per cent on a one-year RD.
RDs can also be used to invest short-term surplus funds as well. For instance, say your second house has been rented out on a two-year lease.
You can start a RD to invest the rentals and on maturity, use the proceeds toward house repairs or repainting if needed.
RDs are a good vehicle for risk-averse investors too. For instance, senior citizens may find RDs attractive.
Most banks offer them higher interest too. While SBI only offers 0.25 per cent higher interest, Axis bank offers 0.75 per cent extra interest to senior citizens on RDS of various tenors.
Due to the ease of understanding, RDs can be a great way to introduce the savings habit in children. Deposits can be started with a small amount of say ₹50, which you may be giving away as their pocket money.
Likewise, RDs are a great way to learn financial discipline. For example, if you want to buy a home in six-nine months and wonder if you will be able to meet the EMI payment commitment, you can ‘simulate’ the situation by starting a short-term RD.
Since deposit rates are widely expected to have peaked out, interest rates on RDs may also come down in tandem with fixed deposit rates in the next few months. You can lock into the high interest rates available now. Karur Vysya Bank, for instance, offers 9.25 per cent on RDs of three- and five-year tenures.
Senior citizens can earn 9.95 per cent interest from Axis Bank’s two- and three-year RDs. These rates are among the highest offered by various banks.
Unlike a FD, there is no TDS. So the entire interest you earn is reinvested and compounded.
However, note that the interest received is not tax-free. It has to be reported under ‘income from other sources’ when you file your IT return.
Here again, you have the option of reporting the interest in the same year it is earned (accrual method), or in the year that the interest is paid to you (cash accounting).
Should you delay or default in your monthly payments, you will incur a penalty.
Penalty, loans, withdrawalsAxis Bank, for instance, requires you to pay 4 per cent interest over the prime lending rate on pending RD dues.
State Bank of India charges ₹1.5 a month on every ₹100 that you fail to deposit against a monthly commitment. And after four late payments, the post office considers your account in default and you have two months to regularise the payment.
If you aren’t sure of making payments on time, you can avoid late payment by opting for a flexible deposit.
Most banks also allow you to make the payment anytime during the month rather than on specific days and you have the choice of depositing a variable amount.
You can dip into the savings by availing a loan or overdraft of 85-95 per cent of the balance, which varies with each bank.
The amount can also be withdrawn prematurely. There is, however, a lock-in period, which is as low as one month in the case of HDFC Bank or as high as three years in the case of an RD with the post office.
There is a penalty on withdrawal though. SBI, for instance, imposes a penalty on the interest you will earn from the deposit.
This could be a 0.5 per cent reduction in the interest you earn, as per the published interest rate at the time you locked into a deposit, or even reducing your interest rate to what is applicable to a deposit of shorter tenor than what you subscribed to, whichever is lower.