Recurring Deposit: Definition, Meaning and Examples

Learn about recurring deposits and whether it’s a good investment opportunity for you.

Recurring Deposit: Definition, Meaning and Examples

As a business owner, one of your goals is, of course, to optimize your revenue and annual income. You can do this by building and growing your business, developing a strategy that will help you widen your customer base and increase your profits. As an eCommerce merchant, you need to offer ways for your customers to make payments online so that they can purchase from you. As you are achieving your goal of making a profit, you might also consider what to do with your income. 

For some people, using a recurring deposit (RD) account is a good option when it comes to a safe and secure investment and savings tool. In this type of account, you commit to depositing a certain amount of money over a specific period of time.

What Does RD Mean?

The RD abbreviation stands for Recurring Deposits and refers to an investment account in which one chooses an amount to automatically deposit each month. Indian banks in particular offer this investment vehicle with terms that generally last from 6 months up to 10 years, with interest rates ranging from 3.5% to 5.5% per year for the public. Senior citizens are eligible to earn an additional .5% to .8% interest on their recurring deposits, creating a nice enhancement to one’s annual income. 

What is a Recurring Deposit with an Example?

By way of example, let’s say that a certain ecommerce merchant is planning to upgrade his website in one year at a particular cost. He cannot be sure that he will have the full amount of cash available the following year. In order to ensure that he has the correct amount of funds that he will need at the right time, he can set up a recurring deposit account. With the help of his banker, he calculates exactly how much money he needs to deposit each month in order to end up with the total amount he will need for the website in one year. Taking into account how much interest will be earned, he is able to plan for the future and put away a small affordable amount each month knowing that he will have the lump sum when he needs it. 

How does a Recurring Deposit Work?

A typical fixed deposit investment entails the commitment of a particular sum of money that is deposited all at once with the intention of withdrawing it with interest after a certain amount of time. During that time, it is usually possible to add or change the amount of money invested in the fixed deposit account. In a recurring deposit, on the other hand, a set amount of money (can even be a fairly small amount) is deposited each month. This amount is determined at the opening of the RD account. At the end of the designated time period, you get back your original investment plus interest earned throughout the time. 

Types of Recurring Deposits

There are four types of recurring deposit accounts as described in the table below:

Payment Service Provider Merchant Account Payment Service Provider Merchant Account
Regular RD Accounts Aged 18 and above Fixed monthly installment and time period. Compound or straightforward, depending on length of account term.
RD Accounts for Minors Under 18, with supervision of parent or guardian Fixed monthly installment and time period. Interest may be slightly higher than regular accounts.
RD Accounts for Senior Citizens 60 years and older Fixed monthly installment and time period. Compounded quarterly. Additional .5% - .8% above regular accounts.
Non-Resident RD Accounts Non-Indian residents Fixed monthly installment and time period - can use income earned in or out of India. Some accounts (NRE) are exempt from tax in India. Interest from some accounts (NRO) are taxable at 30%

What is a Recurring Deposit Account?

A recurring deposit account is a savings account into which regular deposits are automatically made in order to earn interest and provide a safe investment that will pay out after a few months or years. Interest rates are generally compounded quarterly, and the product is designed for people who are interested in putting aside a relatively small amount of money each month in order to get a larger payout later. Recurring deposit accounts tend to earn a higher interest rate than typical savings accounts, for example, because there is no access to the money until the end of the designated time period. 

How to Open an RD Account?

Opening an RD account is fairly simple for anyone who meets the following requirements:

  • An individual
  • A minor over the age of 10 with proof of name
  • A minor 10 years of age or younger with a natural or legal guardian
  • A corporation or commercial organization
  • A government organization 
  • Application form from the bank
  • Passport photos
  • Proof of identity and address
  • KYC documents if requested

Opening RD in a Bank

Once you have a bank account in a particular bank, it is easy to open a recurring deposit account, either online or offline. 

  • Online Application

Most banks allow you to open an RD account online via an easy online application as part of their regular online portal. If you are already a customer of a particular bank, it should be as easy as logging into your account and selecting the option to open an RD account. Then you will just follow the prompts and provide any requested information. You will choose the account from which you want the monthly installment to be debited, the amount of each installment and the time period. You will be given an interest rate and asked where the proceeds should be deposited at the conclusion of the time period. Once you have provided all the information, your application will be reviewed, and you will get an email confirmation. 

  • Offline Application

For those who prefer to apply in person, you can simply go to your local bank branch and fill out an offline application. You will likely be asked the same questions as on the online form, including the installment amounts, the method of monthly payment, the length of time, and where the proceeds should be deposited. The first installment can be made then and there with a check or cash once your application is processed. 

Is There a Minimum Deposit Required?

Each bank can set their own minimums and limits for recurring deposit accounts. The minimum amounts are usually very low. Most RD accounts have a minimum deposit period of 6 months and a maximum of 10 years, with interest compounded each quarter. 

Features of Recurring Deposit Account

While some terms can vary from bank to bank, most recurring deposit accounts share the following basic features:

Feature Details
Limited Restrictions Flexibility to choose deposit amounts (low minimums) and term lengths.
Operations Deposits are made automatically, with interest compounded quarterly.
Interest Rates Usually between 5%-8% depending on the bank.
Nomination Choose where the proceeds are deposited at the end of the term.
Transfer of Funds Funds can be automatically transferred into the account.
Facility of Rebate Depends on bank - some banks allow premature closure of account with a penalty.
Withdrawal Depends on bank - some banks allow midterm withdrawals with a penalty.

Important Factors to Consider Before Starting a Recurring Deposit Account

While recurring deposits are generally considered to be very safe investment vehicles with the return all but guaranteed and limited risk to one’s annual income, there are still some factors that are worth considering before making an investment decision: 

  1. Interest Rate - the interest rate offered may vary from bank to bank and can be anywhere from 3% to 8% with the rates dependent on the term of the deposit. Longer-term deposits will have slightly lower rates, as you will earn a higher amount of interest overall. 
  2. Term Period - short term RD accounts are from 6 months to one year. Medium term RD accounts are from one year to five years, and long-term RD accounts generally last from 5 to 10 years. 
  3. Premature Withdrawal - some banks allow for premature withdrawal but can charge a penalty, so if you think you might go for this option, choose one with a low penalty. 
  4. Taxes - as with most investments and savings accounts, RD accounts are also subject to taxes, so it is important to understand what the implications will be for your specific case. 

Benefits of Recurring Deposit

There are a number of benefits to investing a recurring deposit account, including:

A Simple Investment Product

An RD account is one of the simplest and easy to understand investment solutions offered. You simply deposit a set amount each month and know exactly what you will get at the end. No surprises. It is a very good place for a novice and risk-averse investor to start, and sets up good investing habits for the future. 

Assured Returns

Unlike investments in the stock market that can fluctuate and lose money, impacting annual income, when you make a recurring deposit investment you know that you will get a certain return on your principal based on the interest rate. 

Flexibility of Tenure and Amount to be Deposited

There are lots of options that can suit just about any investor’s specific needs. You can choose an RD account with terms ranging from 6 months to 10 years with very flexible minimum deposit amounts. 

Withdrawal Flexibility 

Although there is likely to be a penalty involved for an early withdrawal, it is typically a small fee and would not prohibit someone from taking the money out early if it was really needed, such as a sudden unexpected change to annual income. 

Loan Facility

Most banks offer the option to easily take out a loan against a recurring deposit. Depending on the bank, you should be able to get a loan equal to 90-95% of the total in the RD account. 

Fixed Interest Rate

The interest rate is set at the opening of the RD account, and you do not need to worry about future fluctuations. Interest rates on recurring deposit accounts are higher than those of traditional savings accounts. 

Online Transaction Facilities

Most banks make it very easy to open and manage an RD account online. You can make the deposits and track your income using the bank’s app or website. 

What is the Difference Between Recurring (RD) and Fixed Deposits (FD)?

Let’s clear up any confusion that may exist between fixed deposits (FD) and recurring deposits. It is easy to get them confused, as there are some similarities between the two, including:

  • Whether you go with fixed deposits or a recurring deposit, both are fixed-income investments in that the interest rates are known and fixed at the beginning and do not change during the investment period. These rates do not fluctuate based on market conditions.
  • In both fixed deposits and recurring deposit accounts, the investor knows exactly what the return will be and how much money will be received upon maturity. 
  • In both FD and RD accounts, premature withdrawal is allowed but requires payment of a penalty.
  • It is possible to take out a loan against either a fixed deposit or RD account. 
Feature Fixed Deposits Recurring Deposit
Target Investor Someone who has a lump sum to invest all at once. Someone who prefers to invest a small amount each month.
Timing 7 days to 10 years 6 months to 10 years
Income Monthly, quarterly or annual payouts. Payout only upon maturity.
Tax Benefits FDs over 5 years offer tax deductions on interest earned. Regular taxes on interest income.

How to Calculate Interest Rates on the RD Account?

One of the advantages to investing in an RD account is being able to know exactly how much money you will have at the end of the term. This amount can easily be calculated using the monthly installment amount that you deposit, the interest rate that your bank has given you, and the length of time that you have signed up for. You can use a recurring deposit calculator found online in order to calculate exactly how much your total principal will be, the interest you will earn and the total maturity amount. 

Can you Close a Recurring Deposit Account?

To close your RD account, you can go into the bank and submit a request in person, or you can do it online via the bank’s website or mobile app. Generally, the closure amount will automatically be deposited into the same account that the monthly installments were coming from, unless other instructions were provided. 

If you close the account before the time of maturity, the bank can keep the interest that has not yet been paid - you will get back your full original investment but not the interest that you have not yet earned. 

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FAQs

RD Meaning?

RD stands for recurring deposit and refers to a risk-free investment that involves depositing a certain amount of money each month for a defined period of time that will earn a set interest rate.

What are the basic product features of the RD account?

The features of an RD account include monthly installments based on a minimum required by the bank, but otherwise the choice of the investor. The investor can also choose the time period between 6 months and 10 years that they would like the investment to last. Based on this, the bank will offer an interest rate.

Who can invest in a recurring deposit scheme?

Any individual - with the consent of a legal guardian for minors - or corporation or government entity can invest in a recurring deposit account provided they have proof of identity and address and can provide any other information that the bank requests.

Why open a Recurring Deposit account?

A recurring deposit account is a safe investment that all but guarantees that you will get a particular amount at the end of the term. It can be a good option for someone who has relatively small amounts to invest each month and wants to save.

Is Recurring Deposit Account taxable?

Yes, in most cases, the interest earned on an RD account is taxable just like any other income.

Can I close the RD through Internet Banking?

Yes, most banks allow for the full operation and management of RD accounts through their online portals. This includes opening a recurring deposit account, tracking and monitoring it, as well as making any changes including closing the account.

What is the minimum amount and maximum amount monthly for an RD?

Each bank can set its own minimum and maximum monthly RD installment amount.

Which is better FD or RD?

Whether you want to invest in a fixed deposit or a recurring deposit is a matter of personal choice and the specific situation you are in. If you have a large amount of money that you would like to invest in one lump sum, a fixed deposit could be a good option for you and will net you a higher return. If, on the other hand, you have a limited amount to invest and prefer to spread out the investment over time, then an RD might work better for you.

Can Tax be saved on recurring deposits?

It’s best to check with your bank and/or accountant to understand the tax implications of your individual situation, as in certain cases there may be tax savings that you are eligible for.

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