Are you looking for a way to save money without having to invest a lump sum amount all at once? Then, a recurring deposit, also known as a recurring account (RD account), is the best option for you. These accounts are designed for those who have a habit of saving small amounts every month. Furthermore, opening such an account with your bank is straightforward. To top it all off, saving up in a recurring deposit can also instil financial discipline.
Definition and Key Features
An RD account is a special type of savings account that allows you to deposit small amounts each month. The bank rewards you with interest on this each month. The rate of interest is usually fixed and is a percentage of the savings you put in each month.
These deposits have a maturity period which you can set, after which you are free to withdraw your savings as well as the accrued interest. It is advisable to use a recurring deposit calculator to estimate the final maturity amount you will receive. Some of the key features of this type of account include:
- The ability to make fixed monthly deposits
- The guarantee of fixed returns without market risks
- The benefit of flexibility in deposit tenure
- No need to invest a lump sum amount initially.
However, to understand these features in more depth, you should know how an RD account works.
How Does It Work?
A recurring deposit, in principle, may be somewhat similar to a fixed deposit. This is because both are wealth-building instruments offered by the bank. Moreover, both let you withdraw your savings and accrued interest after a predetermined tenure. However, an RD account differs in that it does not require a large initial deposit.
Instead, you can make smaller, more manageable contributions to this deposit each month. You should ensure that these contributions are permissible each month according to your budget. These deposits accrue interest that is usually compounded quarterly.
To better understand how this compounded interest leads to your money growing quicker, you can use a recurring deposit calculator. However, before you begin to make monthly deposits, you need to determine whether you are eligible.
Recurring Account Eligibility Criteria
You can easily open a recurring account today, either online or offline, if you meet the following eligibility criteria.
- You must be either salaried, self-employed or an earning student.
- You must be more than 18 years of age (i.e., a legal adult).
- You must be a citizen of India to open a Recurring Deposit (RD) with an Indian bank.
If you fulfil all these criteria, then you can begin exploring the interest rates offered by the RD schemes of different banks in India. Additionally, review the compounding frequency of each bank. This plays a significant role in determining how quickly your money grows.
Interest Rates and Compounding Frequency
The interest rate on an RD account varies depending on the bank and the chosen tenure. It can also depend on your age. Senior citizens are often offered a higher interest rate because many depend on this income for their monthly expenses after retirement.
It is usually similar to the rates offered on fixed deposits. Interest is compounded quarterly, which means your savings grow faster than they would with simple interest calculations. You can use a recurring deposit calculator to compare interest rates from different banks and choose the one that offers the best return.
Types of RD Accounts Offered by Banks
Banks offer different types of recurring deposit accounts to suit various needs. Some of these are:
● Regular RD
This is the standard type of RD, available to everyone regardless of income level or age.
● Senior Citizen RD
This is specially designed for retired senior citizens who solely depend on the interest for their earnings.
● Flexible RD
In this type of RD, you can deposit a different amount each month. There is no predetermined fixed amount, but your interest may differ depending on this.
Tax Implications of RD Investments
The interest earned on a recurring deposit account is taxable. It is added to your total income and taxed as per your income slab. If the interest exceeds a certain amount in a financial year, Tax Deducted at Source (TDS) may be applicable. It’s essential to track interest income, and a recurring deposit calculator can help estimate this amount in advance.
Key Takeaway
An RD account is a great way to build savings slowly and safely. It encourages regular saving, offers guaranteed returns, and is simple to understand and operate. Whether you’re saving for a short-term goal or just want to develop a good habit, this account can help. Use a recurring deposit calculator to plan your deposits and make the most of this trusted financial tool.
