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An introduction to Recurring Deposit

What is a recurring deposit? Where can it be opened? Is it a good avenue to invest your money? Where does it stand compared to a systematic investment plan (SIP)?

Here are your answers.



We know that lump-sum investment in stocks is not advisable. (Please read “Cost Averaging” for more)

Compared to that, one-time lump-sum investments in fixed income instruments are considered to be very safe.

But what if you have limited means, and you can not invest a large amount at one go? Can you still save for your goals, slowly and steadily?

(To know more about goals and investing for them, please read “Goal Based Investing”)

Yes, it is possible. Your answer is: Recurring Deposit.

What is a Recurring Deposit?

A recurring deposit is a fixed deposit (FD), with a slight difference in the way it operates – instead of a one-time lump-sum investment, you make a fixed investment every month.

This monthly investment earns you a fixed rate of interest. At the end of the tenure of the recurring deposit, you get back your invested amount (principal) plus the interest earned on it.

Thus, you make equal periodic payments, and get it back with interest as a lump-sum at the time of maturity.

A recurring deposit is one of the best options available for investors having a low income, apart from Micro SIPs.

(To know more about Micro SIPs, please read “More on Systematic Investment Plan (SIP) and Micro SIP”)


Characteristics and advantages of a recurring deposit

Fixed monthly investment

You invest a fixed sum every month. It’s like paying the EMI!

And the best part is that for most banks, the minimum monthly investment can be as low as Rs. 100! There is usually no upper limit.

Fixed tenure / duration for which you make monthly contribution

You start a recurring deposit account for a fixed time period. You make the pre-determined payment every month for this entire duration.

This maturity period of the recurring deposit can range between 6 months and 10 years.

Fixed rate of interest

The rate of interest offered on a recurring deposit is not floating – it remains the same for the entire tenure of the recurring deposit.

The rate of interest offered varies from bank to bank, and also depends on the tenure of the recurring deposit. But the interest rates offered typically range from around 4% to 10%.

For example, State Bank of India (SBI) offers interest rates between 4.75% and 10%. Similarly, ICICI Bank offers interest rates between 3.75% and 9.5%.

Download the spreadsheet containing detailed calculations for returns from a recurring deposit. You can change the values and find out the returns for your situation.

(You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

Loan / Overdraft facility

Many banks provide the facility of a loan or overdraft against the amount accumulated in your recurring deposit account.

Funds transfer facility

Many banks also provide the facility of direct monthly transfer of funds from your savings account to your recurring deposit account.

Nomination facility

Most banks offer nomination facility for recurring deposit accounts.


Income Tax (IT) Treatment and Benefits

There is no income tax benefit available for a recurring deposit.

The investment in a recurring deposit is not considered for deduction u/s 80C. (Please read “Saving Income Tax – Understanding Section 80C Deductions” to know details of deductions available under section 80C).

Please note that sec 80C benefit is not available even if the recurring deposit is for a period of 5 years or more.

The interest earned on a recurring deposit is also taxable.

Usually, there is no tax deducted at source (TDS) for recurring deposits.

Is a recurring deposit a good investment for you?

A recurring deposit offers the advantages of a regular fixed interest investment: Safety of interest and principal, and predictability of returns.

At the same time, it has the disadvantage of a regular fixed interest investment: A rate of return that barely beats inflation.

Thus, you can invest in a recurring deposit if:

  • You are risk averse, and want to invest in safe avenues
  • Your capacity to save and invest is low


Recurring deposit versus Systematic Investment Plan (SIP)

Both recurring deposit and SIPs are designed for people who want to make small monthly investments. So, how does a recurring deposit compare with SIPs?

An SIP is a method of investing in mutual fund (MF) schemes. Thus, you can invest in equity, balanced, or debt MF schemes using an SIP.

Your return is always market linked when you invest through an SIP, and can keep fluctuating. The amount of return would depend on the type of investment (equity, balanced, or debt) and the performance of the MF scheme.

Compared to this, the return from a recurring deposit is known in advance, and is stable & fixed.

Thus, if you are risk averse, please invest in a recurring deposit.

But if you can take relatively more risks, please consider a Micro Systematic Investment Plan (Micro SIP) in a diversified equity mutual fund scheme, or a balanced scheme.

You can read more about it at “More on Systematic Investment Plan (SIP) and Micro SIP”)

Where can you open a recurring deposit account?

A recurring deposit can be opened at most branches of banks.

A recurring deposit can also be opened at a Post Office. (To know more, please to read “An introduction to Post Office (PO) Recurring Deposit Account”)

Download the spreadsheet containing detailed calculations for returns from a recurring deposit. You can change the values and find out the returns for your situation.

(You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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Comments

  1. Hi SDas,

    I have done the calculations, and it comes to Rs. 37,755. The slight difference from the bank’s calculation might be because of some difference in rounding off.

    You have arrived at a figure of Rs. 39,240 because you have calculated interest of 9% on each installment of the recurring deposit.

    This is not the case in reality – each installment would only earn an interest for the remaining duration. Thus, for example, the deposit you made in the 5th month would earn interest only for the remaining 7 months till maturity. Thus, the interest earned on it would be 9% * (7 / 12).

    This works similarly for all installments, and the total comes to Rs. 37,755.

    Download the spreadsheet containing detailed calculations

    (You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

  2. I opened a recurring a/c in axis bank on 04.03.08 of 3000/-p.m. The maturity date is on 04.03.09. The bank is giving 9% interest on maturity.

    According to that the maturity amount will be 39240 but actually the maturity amount is 37790. I asked for the clarification from the bank but they said that for recurring a/c the calculation is right.

    I am unable to understand the math behind it. If you could kindly explain then i shall be grateful to you.

  3. Anonymous says:

    Hi Ramesh,

    Not sure exactly what information you need.

    This article explains recurring deposits in detail. recurring deposits are also available in post offices – please read “An introduction to Post Office (PO) Recurring Deposit (RD) Account” for more on that.

  4. ramesh trivedi says:

    pl. let me know about recurring investment

  5. Anonymous says:

    Hi Joseph,

    I do not currently have a spreadsheet for calculating interest on an RD. I would try to create it and upload it on the website.

  6. Joseph N says:

    Hi……

    I need the spreadsheet for calculation of interest for recurring deposits.

    Plse assist.

  7. There is no PF in my company. Is there a possibility to contribute to VPF on my own , if yes please let me know the process.

  8. Hi Srinivas,

    No, you can not contribute to VPF without PF.

    You can however open a Public Provident Fund (PPF) account, which is quite similar to PF / VPF.

    For all the details, please check out “Public Provident Fund (PPF) – Plan Your Retirement and Save Tax“.

  9. Hi,

    Can you please tell if there is anything called LTA – Recurring Fixed….if there is something like this then wat is the meaning of it?

    Thank you.

    Umang

  10. Hi,

    Can I pay income tax on interest earned on RD at the time of maturity (on the basis of mercantile system of accounting as per sec 145) or am I suppose to pay it every year (accrual basis). Kindly clarify.

    Thanks!

  11. Hi,

    The article on RD is great , it was such a help and the site is invaluable for a novice in financial planning such as me.
    Gr8 stuff, Hope to learn so much.
    After reading the article, i need some clarification on the IT part, although you mentioned that TDS IS NOT DEDUCTED, however the interest from the RD is TAXABLE, hence iam in quandry.request you to please elaborate on
    1. if int. of rd is taxable or not &
    2. the mode of declaring such taxable income

    currently i file my returns based on form 16 from my employer.

    Regrds,
    Avinash

  12. Raksha Maheshwari says:

    Can you also please add scenarios of what if something goes wrong?

    Say, an RD of 1 year is discontinued after 8 months of payment schedule? etc…

  13. Dear Sir,

    Can you please let me know, whether opening an RD in post office is better or in a bank?

    Regards,
    Narendra

  14. Hello,
    State Bank offers RD for a short period (ie only 90 days) with the interest of 7%. I want to deposit Rs 10,000 (ten thousand) for this period. What would be its maturity value.
    Thank you
    Mike

  15. I dint quite understand how RD’s are less attractive than FDs even for high incomes. Do FDs offer monthly compounding? Lets take an hypothetical example:
    FD-> For 29 years if I save Rs.2,40,000(every year), at approx 8%, my fund value at 30th year would be Rs.76,50,323.

    RD-> For 348 months (29*12), at approx Rs.20,000 pm (2,40,000/12), at approx 8%, my fund value at 30th year would be Rs. 2,72, 92,894.

    All pre tax. Not necessarily we always make money from tax-exemptions only..right? I dint understand…how FDs are better.

    Can u please throw some light, I am novice financial planner!
    thx
    Ash

  16. i joined in a recurrind deposit in Union Bank of India for 5 years. i decided to pay Rs.4000/-per month for the next 5 years. in 5 years i should pay 2,40,000/- the bank may return around 3 Lakhs rupees… my doubt is whether i want to pay income tax on this amount..? when should i want to pay..?. either at the time of recieving the entire amount or every years…?

  17. Hi,

    Which month of the year is the right time to start investing in an RD?

  18. With havin so much written content do you ever run into any issues of plagorism or copyright
    infringement? My site has a lot of completely unique content I’ve either written myself or outsourced but it appears a lot
    of it is popping it up all over the internet without my agreement.
    Do you know any solutions to help protect against
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