Recurring Deposit Schemes

Everything That You Should Know About Recurring Deposit Schemes

(From Benefits to Types to Requirements, Pretty Much Everything That You Should Know About Them)

Nearly any person with a sound mind and financial knowledge plans in advance for his major future goals. But ironically, we rarely plan anything about our short-term goals – that is, goals that we want to achieve in next 6, 8 or may be 10 months. While there’s nothing wrong in planning for the long-term, there’s no reason why we should not plan some sort of financial security for our short-term goals too. A simple and powerful way of doing so are Recurring Deposits.

Recurring Deposit Schemes

Yes – recurring deposit schemes, or RDs as they’re said in financial lingo, can turn out a sound option to help you in achieving your short-term goals. They’re the safest investment option for anyone with a fixed monthly income. In this article we’ll take a look at everything that one should know before investing in them.

Benefits of Recurring Deposit

When it comes to investment for shorter period, RDs provide several benefits over other investment options. For example:

  • Simplicity: It’s very simple to open a RD account with any bank working in India. It doesn’t require you to go through any tedious documentation process, or spend a good amount of your personal time in managing it. In fact, you don’t even need to visit a bank branch for it – you can open an RD account online from your Internet Banking within a few minutes. Everything works simply and smoothly.
  • Guaranteed returns: Another benefit of RD is certainty of return after a certain period, something that you don’t get in other investment options. It’s a completely risk-free investment method that provides you returns on the rates of fixed deposit even if you invest for a smaller period.
  • Freedom of pre-mature withdrawal: If for any reason you want to withdraw your money prematurely, you’re allowed to do so without having to give up a good chunk of your invested money.
  • Loan preference: This is perhaps the biggest benefit that an RD can offer you. If you’re having a recurring deposit with the bank, your loan applications are given preference over those of others. In addition to that you also get pre-approved loan offers sometimes, and interest rates on your loan may also be somewhat lower than normal rates.

These features make RD the perfect investment vehicle not just for those who’re new to the world of investment but also for those who’ve already been enjoying serious returns from other vehicles.

Types of Recurring Deposit

How much interest you receive on your investment depends largely upon the type of RD account that you decide to open. There’re many types of them. Some common ones include:

  • Regular RD schemes: These’re the most popular ones. Anyone older than 18 years can apply for them and start investing a fixed amount of money per month for a certain period. The tenure of these schemes may vary from 6 months to 10 years depending on your decision, and you earn a return on the rate of 7% – 8%. Some banks calculate the interest simply, while others calculate it on a compound basis. I’d suggest you to choose banks that use the compound interest formula.
  • Junior RD schemes: These RDs are meant for kids. Parents may invest in them to start saving for studies, marriage or other needs of their children. Students can also invest themselves, as long as they’re older than 10 years. Banks sometimes provide somewhat higher interest on these schemes to encourage the habit of savings among children from a younger age.
  • Senior RD schemes: As their name suggests, these RD schemes are for senior citizens. Anyone who’s older than 60 years can invest in them and save the money for post-retirement period of his/her life. These schemes come with a higher interest rate of 7.5% to 8.5%.
  • NRE/NRO RD schemes: Both these types of RD schemes have been developed for NRIs. And just like many other things built for NRIs, they aren’t very attractive. But if you’re an NRI, they’re your only option to open a recurring deposit in India. You don’t get a higher interest rate with them – in fact, it may be lower than a regular RD scheme in some circumstances. But usually they provide interest somewhere in the range of 7% – 7.5%.
  • Special Schemes: Aside from aforementioned RD schemes banks also offer many different types of RD schemes to their customers depending on their needs. So before you open any particular RD account with a bank, you should check their other options too.

Factors That Affect Recurring Deposit Interest Rates

Aside from the type of your RD there’re many other factors too that may affect the interest rate that you receive on your recurring deposit. For example:

  • Tenure: The period for which you open an RD account with bank plays a major role in interest rate that’s applied to your account. For example, a medium term deposit for, let’s say 5 years, would attract a higher interest rate than a deposit for less than 1 year. Some banks generously apply a higher interest rate to long-term deposits, but this varies from bank to bank so don’t forget comparing the RD interest rates of banks before opening an account with any of them.
  • Age: RD accounts of senior citizens undeniably attract 0.5% higher interest rate than regular ones. In some banks RD accounts belonging to minors may also be applied a higher interest rate, but that doesn’t happen in all banks.
  • Bank: Interest rates also vary slightly among all banks, so you should always compare the rates of multiple banks before making a choice.
  • TDS: While it does not decrease the interest rate directly, it decreases the amount that you receive upon maturity. Since last year TDS is applicable on interest earned from RDs. If your income from interest is more than Rs. 10,000 for financial year in which you withdraw the amount from RD, the TDS will be deducted at the rate of 10% from amount that you receive upon withdrawal.

Amount and Tenure Required

One of the best things about RDs is that you don’t need to have a lot of money in your hands to start investing in them. An RD account can be opened with as little as Rs. 100 per month, depending on the bank that you choose. And the tenure for which you open the account may also be anywhere between 6 months to 10 years.

However, just like interest rates these things also vary among different banks. So to make your job easier we’re presenting you a table with amount and tenure requirements of major banks regarding RDs:

Bank Name Minimum Amount (per month) Minimum Tenure Maximum Tenure
Punjab National Bank Rs. 100 6 months 10 years
State Bank of India Rs. 100 1 year 10 years
Bank of Baroda Rs. 100 6 months 10 years
Union Bank of India Rs. 100 6 months 5 years
Central Bank of India Rs. 100 6 months 10 years
Corporation Bank Rs. 100 1 year 10 years
IDBI Bank Rs. 100 1 year 10 years
Kotak Mahindra Bank Rs. 100 1 year 10 years
ICICI Bank Rs. 500 6 months 10 years
HDFC Bank Rs. 500 6 months 10 years
Allahabad Bank Rs. 500 5 years 7 years
Axis Bank Rs. 1,000 1 year 10 years
Yes Bank Rs. 1,000 6 months 10 years

As you can observe in the table, public sector banks have much lower minimum requirements to open an RD account. Private sector banks, on the other hand, require you to invest something in the range of Rs. 500 and Rs. 1,000.

Other Things To Consider

Today RD schemes not only provide interest on your earned money – you can also receive many more benefits with them. The special RD products launched by many banks come with awesome benefits that any investor must consider before opening his/her RD account. For example:

  • ICICI Bank has an iWish recurring deposit scheme in which others can also contribute to help you achieve your goals.
  • Some other schemes available in market come with free life insurance plans.
  • Other schemes allow you to withdraw part of your RD account’s balance prematurely without breaking the whole RD.
  • Corporation Bank offers a Millionaire RD scheme in which you get Rs. 1 million upon maturity. It offers annual interest rate of 9.25% , which is the highest rate provided on any RD scheme. Central Bank of India also has a similar scheme named Cent Millionaire, but its interest rate is lower (7.5% per annum) than that of Corporation Bank.
  • And some schemes even provide a higher lump sum amount on maturity of your RD.

All of these goodies seem totally worthwhile options – at least they should certainly be considered before making a decision.  But by the end of the day you should make your choice on the basis of your requirements. After all, what’s the point of any bundled benefit if ROI doesn’t meet your requirements?

I hope this information will help you in planning your RD investment. Keep checking back for more investment advice.

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