#AD
A Recurring Deposit (RD) can be a practical option for individuals who want to save regularly without setting aside a large lump sum at once. Alongside a savings account, an RD can help individuals set aside a fixed amount at regular intervals towards specific financial goals. Banks offer RDs across different tenures and deposit amounts, allowing customers to choose an option that aligns with their savings goals and cash flow. However, the available tenure ranges, minimum instalments and other terms can vary from one bank to another.
Understanding these differences can help you identify an RD that offers the flexibility you need. This article explores the RD tenure and deposit amount options offered by some leading banks in India and the factors to consider when choosing one.
What Makes an RD Flexible?
For many depositors a recurring deposit is a flexible way to open a deposit when compared to a fixed deposit. Instead of a lump sum amount, one can start with small deposits each month, quarter or their preferred duration. Many banks also offer different terms which helps one to align their investments with their goals such as short-term RDs (1 to 6 months tenure) or long – term RDs (3 to 5 years).
Banks Offering Flexible RD Tenures and Deposit Amounts
In India, there are many banks that offer flexible terms for recurring deposit with high interest rates. Some of the best recurring deposits in India in terms of tenures and deposit amount are as follows:
| Bank | Monthly Deposit | Tenure |
|---|---|---|
| DBS Bank | Starting from INR 100 | 91 days to 5 years and above |
| HDFC Bank | Starting from INR 500 | 6 months to 10 years |
| SBI | Starting from 100 | 1 to 10 years |
| ICICI Bank | Starting from INR 500 | 6 months to 10 years |
| Bank of India | Starting from INR 500 | 6 months to 10 years |
Note: To know the latest terms and deposit requirements for recurring deposits visit the bank’s official website for complete information.
How to Choose the Right RD Tenure and Deposit Amount?
When it comes to choosing the right recurring deposit for you, it is important to consider some key steps to ensure your deposits are in line with your financial goals.
Step 1: Define the goal and horizon
Decide what is the purpose of opening an RD with your bank. It can be to build an emergency fund, vacation, insurance premium, down payment, education fee, etc. On the basis of that you can decide the time horizon of your recurring deposit which can be 1 year, 3 year, or 5 years and more.
Step 2: Review your Savings
Calculate your monthly income and your essential expenses, the amount remaining can be used for opening and maintaining a RD.
Step 3: Start Small
Many banks allow you to start with a minimum monthly deposit of as low as INR 100 or INR 500. You can increase the amount in the middle of the tenure (RD top-up) or only after the maturity of your current tenure.
Step 4: Check for Penalties and Fees
Missing a monthly instalment could lead to a penalty fee or charge from the bank. It is important to be aware of such fines and only choose to amount you can consistently pay on time.
How Does RD Interest Calculation Work?
Most Indian banks often use quarterly compounding for calculating the interest on each monthly instalment, with every instalment earning interest for different length of time.
The formula used by bank for calculating interest on an RD are as follows:
M = R x (1 = i)n – 1/ 1 – (1+i)-1/3
Where:
- M = Maturity value
- R = Monthly Instalment
- i = annual rate/400 = quarterly rate in decimal
-
- Example: 7% p.a. is calculated annual rate = 7/400 = 0.0175
- N= tenure in years x 4 = number of quarters
-
- Example: 3 years is divided into 12 quarters.
For example,
- Monthly deposit R = INR 5,000
- Tenure = 12 months (1 year)
- Rate = 7% p.a., compounded quarterly
Then:
- Quarterly rate I = 7/400 = 0.0175
- Number of quarters n – 1 x4 = 4
Using this formula, the maturity comes to roughly INR 62,700 to INR 62,800.
What Are the Tax Implications of RD Interest?
The interest earned on a Recurring Deposit (RD) is fully taxable as “Income from Other Sources’. Some of the key tax implications are:
- Taxed by Slab Rate: The interest you earn gets added to your total annual income and is taxed at your specific income tax bracket.
- Accrual Basis Taxation: The RD interest is taxable in the financial year it accrues, not just when the deposit finally matures.
- Principal is Exempt: Only the interest portion of your RD payout is taxed, your monthly principal deposits are tax-free.
- Tax Deducted at Source (TDS): Banks and post offices deduct a 10% TDS (20% if you haven’t linked your PAN) if you aggregate interest from all deposits crosses INR 40,000 in a financial year, or INR 50,000 for senior citizens.
- Exemptions: You can submit Form 15G or Form 15H to your bank at the start of the financial year to prevent TDS if your overall income is below the taxable limit.
Conclusion
The flexibility offered by an RD can make it easier to build savings through regular deposits while working towards a defined financial goal. Banks differ in their minimum deposit amounts and tenure options, so comparing these features can help you choose an RD that suits your savings capacity and time horizon. Before opening an RD, consider the deposit amount you can consistently set aside, the required tenure, applicable charges and the interest earned. You can also evaluate an RD alongside a high interest savings account based on your liquidity needs and overall savings strategy. Reviewing these factors can help you select suitable banking products for your financial needs and savings plan.
