Recurring deposits, also known as RD are term deposits which allow people to make regular deposits and earn attractive interests on them. Account holders can choose the period of the deposits and even the amount to be deposited regularly. RD offers higher flexibility than Fixed Deposits and is therefore more apt for those individuals who earn regular income and are unable to make bulk deposits in one go. It inculcates a habit of saving among individuals across all income categories. Recurring Deposits are offered by all banks in India. Interest rates are very competitive among banks, usually ranging around 6-7%, which are fixed for a tenure that is once decided, doesn’t change during the tenure.
Recurring Deposit has a time period for which the sums invested gets fixed or locked.
The returns on RD are taxable and also withdrawing money before maturity expires can lead to penalties. The taxation feature in RDs will not help you beat inflation if you fall in the higher tax bracket
The amount can only be withdrawn on maturity. In case of emergency you can break your RD before maturity by closing your account. The bank may deduct 1 or 2 percent as interest penalty from the interest accrued on your RD amount for the period for which the amount was with the bank. The minimum lock in period is 3 months and if the depositor request a premature withdrawal before that, he earns zero interest and only the principal amount will be refunded to him. Apart from cancelled interest, any incentives offered are also withdrawn.
Partial withdrawal is not allowed. However, some banks offer the facility to obtain loan or overdraft by keeping your deposit as collateral. On the other hand, premature withdrawals are allowed by post offices if you have an RD account with them for at least a year. The withdrawn amount is considered a loan, which has to be paid in lump sum.
Earlier no tax was deducted on recurring deposit. With effect to 1st June, 2015, these deposits are subject to TDS (tax deducted at source) as per the income tax laws. However, no TDS would be deducted if the interest income earned does not exceed Rs. 10,000 in a financial year. Tax is to be paid as per applicable slabs at the time of filing income tax return. If you have submitted Form 15G (in case of normal citizens) and 15H (in case of senior citizen) in the bank, your TDS will not be deducted (in case your total taxable income doesn’t come under tax slab).
Senior citizens can also open a RD account. The rate of interest they earn is slightly higher than the regular deposits available to other citizens. Generally banks offer 0.25 percent to 0.75 percent more interest than normal RDs, compounded annually and the tenure and amount is fixed by banks. Indian residents and NRIs both can open this account.