Recurring Deposit (RD): Features and Benefits

Small yet periodic investments. Little to no risk. Assured returns. Flexible choice of investment tenures. If these are all boxes you’re looking to check off, an RD may be just what fits the bill. The full form of ‘RD’ is a recurring deposit. This financial product makes it easy for you to save diligently and grow your capital, even if you do not have a lump sum amount available at the outset. 

If you’re not sure what the meaning of a recurring deposit is and how it works, read this article to find out everything you need to know about RDs. 

What Is a Recurring Deposit?

A recurring deposit is an investment option that allows you to deposit fixed sums periodically and regularly in your RD account. These deposits are made over a predetermined investment tenure, which may range from 6 months to 10 years or more. The minimum amount that you can invest in a recurring deposit is generally low, often even just Rs. 100 or so. This makes RDs accessible to investors with varying budgets.

Over the investment tenure, you earn interest on the balance in your recurring deposit account. This interest is compounded quarterly and reinvested in the RD account. At the time of maturity, you receive the principal (i.e. the sum total of the deposits made) along with the accumulated interest. 

Top Features and Benefits of a Recurring Deposit 

Now that you know the full form of RD, the meaning of a recurring deposit and how it works, let’s discuss the defining features of an RD.

• Low Minimum Investment

Recurring deposits typically have low minimum investment requirements, making them accessible to a wide range of investors — including students, small traders and those with limited income. This feature is particularly beneficial if you do not have a large sum of money to invest upfront. The exact minimum amount varies across different banks but is typically set at Rs. 100 to encourage regular savings.

• Flexible Investment Tenure

Another key feature of recurring deposits is the flexibility they offer in terms of investment tenure. With options generally ranging from 6 months to 10 years, you can choose a duration that suits your financial goals and savings capacity. This flexibility allows you to align your RD with specific financial objectives — whether short-term or long-term — and provides a structured avenue for savings.

• Guaranteed Interest

RDs offer the security of guaranteed interest returns, which is a significant benefit if you are a conservative investor who steers clear of market risk. The interest rate, which is decided at the beginning of the tenure, remains fixed throughout the deposit period. This feature is particularly appealing in volatile economic times because it protects your capital from eroding due to market fluctuations and ensures a steady accumulation of savings.

• Compounding of Interest

The interest in a recurring deposit scheme is compounded, usually on a quarterly basis. This means that the interest earned is reinvested every quarter and earns further interest. The compounding effect accelerates the growth of the investment over time, making RDs an attractive option for long-term savings. It essentially allows your money to work harder because the interest accumulation increases with each passing quarter.

• Higher Rate of Interest for Senior Citizens

Banks often offer higher interest rates on RDs for senior citizens. This is because of the need for more secure and higher-yielding investment options during retirement. Marginally higher interest rates (usually up by 0.50%) help senior citizens maximise the returns on their savings. The enhanced interest rates also help seniors counteract the effects of inflation and maintain their standard of living.

Types of Recurring Deposit Accounts

Depending on the category of individuals they cater to, there are different types of recurring deposit accounts. You need to be aware of these, so you can open the right kind of RD. So, let’s take a closer look at the different types of recurring deposit accounts you can open in India.

• Regular Recurring Deposits

These RDs can be opened by Indian citizens who are over the age of 18 but below the age of 60. They do not offer any preferential rates of interest. 

• Minor Recurring Deposits

Minor recurring deposits, as the name indicates, are for minors below the age of 18. These RDs can be opened with the consent/supervision of the minor’s parent or legal guardian.

• Senior Citizen Recurring Deposits

These recurring deposits are exclusively for resident senior citizens over the age of 60 years. They typically carry preferential interest rates. 

• Recurring Deposits for Non-Resident Indians (NRIs)

For non-resident Indians, there are NRE and NRO recurring deposits that help account holders save diligently for the future. 

Documents Required to Open an RD 

The exact list of documents required to open a recurring deposit may vary slightly from one bank to the next. Broadly, the following documents are typically required. 

• Identity proof like PAN, Aadhaar, passport or voter’s ID
• Address proof like Aadhaar, passport, voter’s ID or a recent utility bill
• A passport-sized photo of the account holder
• RD application form

Taxability of Recurring Deposit Interest

Recurring deposits do not offer any tax benefits in India. The interest that you earn from your recurring deposit is taxable as per the income tax slab rate applicable to you. Banks and NBFCs may deduct tax at source from your recurring deposit payout at maturity. In case your total taxable income is below the exemption limit, you can claim a refund of this tax by filing your income tax return.

An easier alternative to avoid tax deductions from the RD interest is to submit Form 15G (or 15H for senior citizens) to the bank. This is a request to avoid any TDS deduction. Only individuals whose total taxable income does not exceed the basic exemption limit can submit this form.

Conclusion

Now that you are aware of what an RD is in banks and NBFCs, you can make an informed decision about choosing this financial product. It may be best suited for you if you are planning on saving up for a short-term or medium-term financial commitment. If you do decide to open an RD, ensure that you deposit the instalments diligently, without any delay. This way, you can continue to earn interest on your deposits and avoid incurring any penalties. 

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