5 Things To Consider Before Opening A Recurring Deposit

By Author: Judgej
Total Articles: 5
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Discipline is the best tool to build your corpus steadily. Timely instalments, however small, can help you achieve your investment goals. One of the best ways to do that, which is gaining popularity quickly, is opening a Recurring Deposit (RD) account.
While RDs are an excellent investment tool and offer many benefits, it is essential to consider a few important points before taking the plunge. Here is a list of things you must consider before you open one.
1. Minimum Deposit Amount – You can open an RD account with a minimum deposit of Rs. 100, thus, making it easy to open one. The instalments can be chosen in multiples of 100 only. Once an instalment amount is fixed, the depositor cannot change it at a later date. If the account holder fails to deposit the instalment consecutively for three months, the Bank reserves the right to close the account.
2. Tenure – From a minimum tenure of just 6 months to a period extending up to 10 years, you can choose the tenure of your Recurring Deposit as per your convenience, usually in multiples of 3. Some banks also allow you to open an RD account for a minimum ...
... duration of 3 months.
In case you decide to close the account before the minimum duration, only the principal is returned and any interest accumulated is forfeited. Do note that minimum tenure for NRE RDs is usually one year.
3. Interest Rate – Interest is accrued on the remaining balance in an RD account every quarter. However, the interest, along with the principal amount, is paid only when the account completes its tenure. The RD account interest rate varies based on tenure - the longer the tenure, the higher the interest rate. Senior citizens are usually eligible for a higher rate of interest (usually 50 basis points) on their RD accounts.
4. Withdrawals – Once the money is deposited in a Recurring Deposit account, it cannot be withdrawn before the tenure ends. Although the premature withdrawal of the amount deposited is allowed, a penalty at the rate of 1% is levied. You cannot make a partial withdrawal from the RD account. However, some banks do allow you to take a loan with your RD account as collateral.
5. Tax on RD – As mandated by the income tax guidelines under Section 194A (effective since June 2015), TDS is deducted if the interest payable exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens). In case your yearly income falls in the non-taxable level, you can furnish form 15G to ensure the banks does not deduct TDS. Alternatively, you can file the returns and get a tax refund on the TDS deducted.
The TDS deducted is not the final tax liability on the earnings made from your deposits. The interest earned is added to your earnings and appropriate tax is applicable as per your tax slab after accounting for TDS if any.
Recurring deposits are an excellent way to save and inculcate a discipline of investment. Make sure you choose a credible bank that offers lowest minimum duration, favourable interest rates and hassle-free opening.