A recurring deposit is a type of saving cum deposit scheme offered by banks. Another type of deposit scheme offered by banks is a fixed deposit. A fixed deposit has rigid frameworks where the amount you invest remains locked in for a period of time.
However, you may make withdrawals from the fixed deposit account only against stiff penalties.
An rd account on the other hand offers you the flexibility to deposit money in installments, much unlike a fixed deposit where you deposit the money at one go. You can invest money at periodic times of your choosing, and earn interest on the amount.
Features of a recurring deposit account –
1. The minimum deposit period is 6 months whereas the maximum deposit period is 10 years.
2. The rate of interest offered on a recurring deposit is equal to that of fixed deposits.
3. You may also take a loan from the bank by keeping the deposit as a collateral.
The interest on an rd account is usually calculated on a quarterly basis. The interest rates are compounded, where the interest amount is added to the principal. The new amount (principal + interest) is taken as the new principal on which the successive interest rate gets calculated.
The procedure –
To start a recurring deposit scheme, you will initially have to decide upon the tenure and type of deposit scheme. Once the plan starts, you will have to invest the required amount till the concerned period of time is over. The rate of interest for a recurring deposit varies from 7% to 8%, depending upon the deposit amount and tenure. The risks in a recurring deposit is very low where you can easily calculate the final amount you will receive at the end of the tenure.
You need to choose a bank where you would like to open an RD account. Once the scheme and tenure is decided, you need to make a provision for payment. You can allow the amount to be deducted through the convenience of an ECS (Electronic Clearance System). ECS is a process where the required amount is directly debited from your bank account on a periodic basis.
Advantages of a recurring deposit –
1. The minimum amount required to invest is very low.
2. The rate of interest for a recurring deposit account is higher than that of a savings account.
3. No tax is deducted at source or on the interest earned.
4. It is a low risk instrument.
5. Higher interest amounts owing to quarterly compounding
6. Eligible for loan up to 75% of outstanding amount