Did you own a Piggy Bank or any other money box as a child? Remember how you would drop coins often and sometimes notes in this box, count it sometimes and feel happy that your money is growing?
If you’ve done this simple thing during childhood, you’d surely have some idea about what is Recurring Deposit.
However, modern-day Recurring Deposit (RD) isn’t as simple as dropping coins in a money box to make it full. It’s a tad more complex than that. I’ll explain how a Recurring Deposit or RD account works.
What’s a Recurring Deposit?
As the term rightly says ‘Recurring’ means something that happens at regular intervals. Deposit, of course, implies that you put some money into the account.
By this corollary, Recurring Deposit is a savings account in which you credit a fixed amount of money every month, on or before a certain date. This date is agreed upon between the financial institution and you.
Furthermore, you can choose the number of months of years during which you will pay that fixed amount to your Recurring Deposit account.
A financial institution will pay interest depending upon how many years you wish to continue the Recurring Deposit account.
bd Term of Recurring Deposit Accounts
Under existing banking and finance laws in India, the minimum tenure of a Recurring Deposit is 180 days or six months. This can be extended by periods of three months each and up to a maximum of 10 years only for Resident Indian category.
For Non-Resident Indians (NRIs), minimum tenure of a Recurring Deposit account is 12 months, extendable up to a maximum of 10 years. They have some benefits compared to Recurring Deposits held by Resident Indians.
Advantages of NRE Accounts
NRIs enjoy a couple of additional benefit for opening a Recurring Deposit account with any financial institution in India.
There are two distinct Recurring Deposit accounts that NRIs can open.
Non-Resident Rupee (Expatriation) (NRE)
However, the NRI should reside in a foreign country during this tenure of 10 years to enjoy the benefits of an NRE Recurring Deposit account.
One of the benefits of NRE Recurring Deposit account is the facility to deposit money from abroad after foreign currency is converted as Indian Rupee. And secondly, converting the money and interest on an RD to foreign currency and taking it outside India, if needed.
Some financial institutions waive off currency exchange charges on remittances in foreign currency for depositing as Indian Rupee in a Recurring Deposit Account.
Others offer a free international debit card that allows NRIs to withdraw part of their Recurring Deposit savings in a foreign country. However, such withdrawals attract a stiff transaction charge and drop the amount of interest you can earn.
Non-Resident Ordinary (NRO)
An NRI can open a Non-Resident Ordinary (NRO) Recurring Deposit account too. This account is ideal for expatriate Indians that have fixed monthly income from sources such as rent or lease from a property in India or other assets.
Deposits in NRO accounts have to be made locally only. Meaning, you can’t remit money from abroad for depositing in an NRO Recurring Deposit Account.
However, you can send foreign currency to a family member and ask them to credit your NRO Recurring Deposit after conversion to Indian Rupee.
Under existing laws, NRIs cannot take the money invested in an NRO Recurring Deposit account and its interest outside India. The rule, however, is applied rather loosely.
NRO Recurring Deposit holders can also get a debit card but for use within India only. They can’t withdraw money from the account abroad, in foreign currency. Such withdrawals too attract heavy charges and you can lose some amount of interest you would earn.
- Financial Institutions usually offer between 0.2 percent and 1 percent extra interest rates on Recurring Deposit accounts held by NRIs. However, you need to stay abroad during tenure of the Recurring Deposit account to avail the extra interest.
- If an NRI returns to India and ceases to live abroad, the Recurring Deposit account has to be converted to the Resident Indian category 180 days after arrival in this country. Interest rates would also vary slightly.
Opening Recurring Deposit
Any Indian individual above 18 years age can open a Recurring Deposit account either singly, or jointly with parents, spouse or family.
You can also open a Recurring Deposit account in the name of a minor child (below 18 years age). In case of minor accounts, you’ve to designate an adult to act Legal Guardian. A Legal Guardian can be a family member or even a friend.
Most financial institutions accept Recurring Deposits in different forms. We’ll discuss these later in this article.
However, to open a Recurring Deposit account, you’ll have to complete full Know Your Customer formalities. This means providing proof of identity and address as well as two or more passport size photographs.
List of KYC Documents
Following the Supreme Court of India verdict on limiting use of Aadhar Card as mandatory, here’s a list of documents you’ll need for full KYC.
Proof of Identity
- Permanent Account Number (PAN).
- Form-80 if you don’t have a PAN.
- Proof of Identity such as Aadhar card, driving license, PAN card, passport, Pension & Retirement Authority (PRAN) card, Voter ID card of any other document issued by the Central or State government and its authorized departments.
Proof of Address
- Aadhar card, PRAN card.
- Valid passport.
- Utility bill in your name or that of a house owner where you reside.
- Sale deed of the house in your name.
- Lease agreement for the house in your name.
- A financial institution can also ask for Proof of Birth to know your age. However, this is applicable only when you are opening a Recurring Deposit in the name of a minor.
- Sometimes, a financial institution can ask for Proof of Income in the form or salary certificate from employer or bank statements where salary is credited.
- Certificate of the card issued under Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA).
- High net-worth individuals may have to submit their latest Income Tax Returns certificate for the last financial year.
You can have one or more Recurring Deposit accounts in various financial institutions. However, each account has to be fully KYC compliant.
Opening a Recurring Deposit
Now here comes the most interesting part: opening a Recurring Deposit account. Surely, you’d love to get the highest possible interest rate on your Recurring Deposit. Therefore, here’s are the types of financial institutions where you can open a Recurring Deposit account.
- India Post Savings Bank/ India Post Payments Bank
- Nationalized/ Public Sector Banks.
- Cooperative Banks.
- Private Banks.
- Small Finance Banks.
- Rural Banks.
- Foreign Banks operating in India.
- Cooperative Credit Societies/ Employee Credit Unions
- Non-Banking Financial Companies.
Best RD Interest Rates in 2019
Most banks and other financial institutions have revised their interest rates on RDs to make the, more attractive for investors.
SFBs and India Post
Currently, the new generation of lenders known as Small Finance Banks offer the highest interest rates on Recurring Deposit accounts in India for Resident Indians and NRI.
These vary between 9.0 percent per annum for senior citizens to 8.5 percent for NRIs and 8.3 percent for Resident Indians. However, most SFBs have limited number of branches. Hence, you mightn’t be able to find one in your area.
The next best RD rates in 2019 are from India Post Savings Bank and India Post Payments Bank. You can open a Recurring Deposit account at more than 155,000 post offices in India.
Postal Recurring Deposit accounts fetch a 7.3 percent interest per annum all categories- senior citizen and NRIs.
Banks in India
Nationalized, cooperative, private and rural banks offer between 7.85 percent and 6.0 percent interest on a five-year Recurring Deposits. Surprisingly, some of the topmost nationalized banks offer the lowest interest rates on Recurring Deposit accounts.
Foreign banks operating in India offer very high rates on your RD too. Germany’s banking major, Deutsche Bank gives as high as 8.25 percent interest per annum on your Recurring Deposit followed by Development Bank of Singapore at 7.0 percent.
Again, these banks have very limited presence in India and opening an account can prove fairly difficult, unless you are living in a city where they have a branch.
Cooperative Credit Societies/ Employee Credit Union
You can get whopping 9.0 percent per annum on Recurring Deposit accounts from reputed Cooperative Credit Societies. Senior citizens can get up to 9.5 percent and NRIs as much as 9.8 percent, depending upon the financial institution.
Again, the problem lies with finding a good Cooperative Credit Society since most of them operate locally or regionally and don’t have nationwide or even state-wide presence.
Another issue with Cooperative Credit Societies is their sustainability. There’ve been several instances where such societies have floundered and failed due to mismanagement and frauds.
Non-Banking Financial Companies
DHFL and a few other NBFCs in India were offering Recurring Deposit schemes to Resident Indians and NRIs. However, most of them are scrapping the facility and accepting Fixed Deposits only. They would offer about 8.0 percent interest per annum on your RD accounts.
Recurring Deposit Rate Calculator
As we can see, every financial institution has different interest rates on RD accounts. Hence, it can be fairly difficult to find how much money you can make by saving a fixed amount over a period of say five to 10 years.
Here, I recommend you use an excellent Recurring Deposit Rate Calculator from any good bank. The rate might not be accurate if you’re planning on opening an account with another bank. However, it will provide some indication about how much you stand to gain from your Recurring Deposit.
Invest in a Recurring Deposit account only if you are looking at very safe options with minimal risk and moderate returns. Because RD accounts have several advantages and disadvantages nowadays.
Advantages of Recurring Deposit
There are several advantages to opening a Recurring Deposit Account. I’ll enumerate some of the topmost benefits here.
- RD accounts help you develop a savings habit. Since you know that a fixed amount of money has to go to the account, you’re forced to keep it aside.
- RDs are excellent if you’re planning to save for your child’s education or build wealth for the family to meet expenses, in the event of your demise.
- Recurring Deposits are very useful for small investors or people with lower income. They can save as low as Rs.10 per month in RD accounts.
- You can provide savings in an RD account as collateral or security while taking a secured loan from any financial institution. This is done by pledging the RD account- meaning, you can’t withdraw any money.
- If you have fixed income such as rents from your property, having an RD is useful. The rent you get can go towards building wealth.
- Opening a Recurring Deposit account in the name of your children helps them develop a savings habit that helps them lifelong.
- Recurring Deposits are not affected by money and stock market volatilities. This means you’re assured of getting the amount promised by the financial institution when an RD matures.
- Reserve Bank of India’s subsidiary, Deposit Insurance & Credit Guarantee Corporation ensures you get back up to Rs.100,000 from your
Disadvantages of Recurring Deposit
There are equal disadvantages of having an RD account too. Therefore, weigh your options before investing in an RD account.
- Interest over Rs.10,000 per annum is taxable under Income Tax laws of India. However, this depends upon your overall tax liability. Even if you come under ‘income tax exempt’ category, it’s compulsory to declare the interest you’ve earned from an RD while filing Income Tax Returns.
- Nowadays there’s another excellent way to build wealth by investing a small, fixed amount of money every month. You would’ve heard of Systematic Investment Plans or SIPs. You can invest as low as Rs.100 per month on a SIP. Basically, a SIP means you are investing a fixed amount of money on buying Mutual Funds worth the amount. Often, equity-based Mutual Funds and their SIPs provide as high as 18 percent per annum returns. However, this depends upon stock market stability.
- Premature withdrawals of RDs is generally not allowed. And if you have to withdraw before the end of the tenure, you can lose considerable money. SIPs come with no such restrictions unless you’re investing in a ‘lock-in’ scheme.
- The interest you get on RDs doesn’t often justify the time and investment: Indian Rupee tends to deprecate rather rapidly over the years.
- RDs do not provide any buffer or hedging against inflation. Often, inflation can wipe out any benefit you can get as interest from an RD.
- A Recurring Deposit has a maximum tenure of 10 years from the date of opening. Of course, you can open another account or invest the money in a Fixed Deposit. In stark contrast, you can decide the number of years of a SIP or have one lifelong.
- Pygmy bank schemes that allow small investors and low-income earners to save daily can provide better returns.
- In recent years, interest rates on RDs indicate a downward slide due to a frequent revision of Repurchase Rates (Repo Rate) by Reserve Bank of India.
Despite several inherent disadvantages, I still recommend people to open at least one RD account. This could be for any small amount too. An RD need not be the mainstay of your portfolio to build wealth.
Yet, having one does make sense, alongside other savings and investment products. Because the final amount you get after or without taxation can prove very useful for multiple purposes such a higher education of children, savings for retirement or even buy that dream house.
You can give standing instructions to your bank to credit a fixed amount of money to your RD account. Since RDs can be opened with small amounts, you won’t miss the money you’re saving. Hence, having an RD account is worthwhile by all standards.