A Recurring Deposit (RD) is one of the type of deposits where a fixed amount is invested every month for a pre-decided period. The interest on the deposit is calculated monthly. If you invest in a recurring deposit, you can take advantage of the compounding effect. A recurring deposit is like a fixed deposit, where the same principle is spent every month. Each deposit plus the interest matures at the same time.
The minimum tenure for a Recurring Deposit is 6 months. The maximum mandate is 10 years. The tenure increases in multiples of 3 months so that a Recurring Deposit account can be opened for 6 months, 9 months, 12 months and so on till 10 years.
The minimum investment amount starts from as low as INR 100 per month. The maximum investment goes up to INR 14,99,900 per month. You can open an RD with whatever amount you want to invest with, as long as it is within the investment limits.
An RD has other standard features of fixed deposit, such as nomination facility, renewal facility etc. You can also avail a loan against a recurring deposit. Like a fixed deposit, a recurring deposit account can be opened by resident individuals, Hindu undivided families (HUF), companies, trusts and societies.
The benefits of a recurring deposit are:
1. Encourages monthly saving habit:
In a Recurring Deposit account, you invest a fixed sum regularly for a predefined number of months. This puts a commitment to your finances and encourages a minimum amount of savings for the month. For small investors, or people who don’t have too many savings, investing in an RD account is beneficial since they can put in amounts regularly as compared to a lump sum amount at one time.
2. The benefit of compounding:
A Recurring Deposit earns interest on each installment. The interest is also added to the principal amount and earns additional interest in the following months. Thus, the account is a great way to take benefit of compounding.
3. No TDS if interest is under Rs. 10,000:
Interest on Recurring Deposit account is subject to TDS rules. But to ensure this does not hit small investors, the limit for TDS is set to INR 10,000. This will ensure that people who invest small amounts do not get hit unnecessarily by a tax that they are not liable to pay anyway.
4. Low minimum contribution:
The Recurring Deposit is meant for people who have small monthly savings. Since the minimum monthly contribution amount is set as low as Rs. 100, it is possible for people of all sections of the society to invest in a recurring deposit account and build savings.