What is RD (Recurring Deposit)

Recurring Deposit

A Recurring Deposit or RD as it is commonly called is a unique term deposit offered by banks. It is an investment tool which permits those with an ability to make regular deposits earn decent returns on their investment. Basically consisting of regular deposits and an interest component, a Recurring Deposits provides flexibility and ease of use to individuals. Account holders can choose to invest a particular amount each month, ensuring that they have sufficient income for an emergency, with the RD earning decent interest on the amount. Given the fact that FDs are rigid and are not ideal for short terms, a Recurring Deposit is an ideal investment cum savings option.

Almost all major banks in India offer a Recurring Deposit Account, with the term typically ranging between 6 months and 10 years, providing individuals an opportunity to choose a term as per their needs. Competition among banks to attract new customers has ensured that interest rates are competitive, helping an investor earn a good amount on maturity. The interest rate, once determined, does not change during the tenure, with the Reserve Bank of India ensuring that strict guidelines are followed. On maturity, the individual will be paid a lump sum amount which includes the regular, periodic investments and the interest earned on them.

Features of Recurring Deposit

RD offers you a fixed interest on the invested amount at a specific frequency till the pre-determined term or upon maturity. At the end of the term, the amount upon maturity(which is your invested capital) along with remaining or accumulated interest is paid.

The main features of Recurring Deposit account are as follows:

• Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.
• The minimum amount that can be deposited varies from bank to bank. It can be an amount as small as Rs.10.
• The minimum period of deposit starts at six months and the maximum period of deposit is ten years.
• The rate of interest is equal to that offered for a Fixed Deposit and is hence higher than any other Savings scheme.
• Premature and mid-term withdrawals are not allowed. However, the bank may allow closing the account before the maturity period, sometimes with a penalty for premature withdrawal.
• RD offers the additional benefit of taking a loan against the deposit, i.e., by using the deposit as a collateral. About 80 to 90% of the deposit value can be given as loan to the account holder.
• The Recurring Deposit can be funded periodically through Standing Instructions which are the instructions given by the customer to the bank to credit the Recurring Deposit account every month from his/her Savings or Current account.

3 Important Factors to Check Before Applying for RD

Recurring deposit is an investment product that is made available by banks. The principal amount invested earns interest at regular intervals and the lump sum is handed over to the depositor at the time of maturity. Although recurring deposit is a safe investment option and the return on investment is mostly guaranteed, there are some factors any person should consider before investing money in a recurring deposit account.

• Interest Rate Offered by the Recurring Deposit Account: The interest rate offered by banks on different term periods varies from bank to bank. The interest rate offered by different banks to a recurring deposit account holder generally ranges from 3.5% to 8.5% p.a. The rates of return vary depending on the tenure of the deposit selected. For medium-term deposits, the rates are generally the highest. For long-term deposits, the rates are usually slightly lower as the deposit holder stands to gain a higher amount of interest overall.
• Term Period of the Recurring Deposit Account: The term periods are divided into three categories:
  1. Short-Term Tenure: A short-term tenure usually lasts from 6 months to a year.
  2. Medium-Term Tenure: A medium-term tenure usually lasts from more than a year to 5 years.
  3. Long-Term Tenure: A long-term tenure lasts from more than 5 years to 10 years.
  A method of earning on the capital invested in a recurring deposit account is to invest in the term period that provides a high rate of interest for the term period being as short as possible.
• Facility of Premature Withdrawal in the Recurring Deposit Account: All banks that offer the facility of opening a recurring deposit account also provide the option of premature withdrawal with it. The interest payments will be calculated based on how much of the tenure is completed. A premature withdrawal penalty will also be charged by the bank. Therefore, while investing in a recurring deposit account, choose such a bank that offers the high rate of interest and charges a low fee on premature withdrawal.

Recurring Deposit: Eligibility Criteria

• Any individual.
• Any minor who is above 10 years of age is eligible to open a recurring deposit account if he or she provides proof of the name.
• Any minor who is below or equal to 10 years of age under the guardianship of natural or legal guardian. 
• Any corporate, company, proprietorship or commercial organization.
• Any government organization.

Recurring Deposit: Documents Required

• Application form which can be obtained from the bank you select to open the recurring deposit account in.
• Passport size photographs of the applicant.
• Identity proof and address proof of the applicant willing to open the recurring deposit account.
• KYC documents if the bank requests for it.

Recurring Deposit Formula

• The formula to calculate the interest that can be availed by the depositor at the end of the maturity period for a recurring deposit account is as follows:
  I={{P*n(n+1)r}/{12*2*100}}}
  where,
  ‘I’ is the interest rate that is to be calculated via the formula.
  ‘n’ is the number of months.
  ‘r’ is the rate of interest per annum.
  ‘P’ is the principal amount.
• The formula to calculate the maturity amount is
  M = P(n)+I
  where,
  M is the maturity amount received by the depositor from the recurring deposit account at the end of the maturity period.
  P(n) is the principal amount deposited.
  I am the interest received by the depositor on the recurring deposit account.

Renewals and Withdrawals of Recurring Deposits

During the premature closure of a Recurring Deposit for reinvestment in a term deposit, interest will be paid to the account holder without reducing the interest rate by 1% as a penalty. This happens only if the deposit after reinvestment remains with the bank for a period longer than the remaining period of the original deposit. However, if the account holder withdraws the deposited amount before its maturity, the rate of interest that he/she will receive shall be the one applicable to the period for which the deposit has remained with the bank, with a one percent penalty for premature withdrawal. If after reinvestment the deposit is withdrawn before the maturity period, the penalty of one percent will be levied from the date of the original contract up to the date of premature withdrawal after reinvestment. If the premature withdrawal is made after the due date of maturity of the deposit, then the penalty is levied from the date of reinvestment to the date of premature withdrawal after reinvestment. Terms and conditions about renewal and withdrawal of Recurring Deposits vary from bank to bank.