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All about recurring deposits

[ecis2016.org] In this article we explain in detail all about recurring deposit, types of RD and eligibility

RD full form is a recurring deposit. In India, recurring deposits are a type of term deposit that allows regular income earners to deposit a fixed sum into their recurring deposit account every month that earns interest at the fixed deposit rate.  RDs tend to be more flexible than fixed deposit schemes, so they tend to be preferred by those who want to start an account to save for rainy days.

Recurring deposit: Features 

  •         A minimum investment of Rs 100 per month is required to open an RD account.
  •         Deposits in RD accounts can be held for a minimum of six months and a maximum of ten years.
  •         Accounts with RDs offer higher interest rates than savings accounts.
  •         Quarterly compounding is the norm for banks.
  •         RD accounts have a lock-in period of 30 days to 3 months at the discretion of the bank. No interest will be paid on withdrawals made within the lock-in period.
  •         It is possible to open as many RD accounts as you like as a single account holder.
  •         There are a few banks and post offices that allow advance deposits.
  •         It is not possible to withdraw partial amounts.
  •         The withdrawal of funds is subject to a penalty if made prematurely.
  •         Rather than paying a lump sum as with a fixed deposit, make monthly payments.
  •         Automate the deduction of your instalments from your savings account by setting up standing instructions.
  •         An additional 0.5% interest rate may be available to senior citizens.
  •         It is possible to open an RD account in the name of a minor, provided their parents/guardians supervise the process.
  •         The RD balance can be overdrawn or lent.

Recurring deposits: Advantages

Investment tools such as recurring deposit (RD) accounts allow investors to make regular monthly investments and save money over time. According to their convenience, investors may choose the term of the deposit and the amount of the monthly payment. RDs tend to be more flexible than fixed deposit schemes, so they tend to be preferred by those who want to start an account to save for rainy days.

  •         Encourages saving habits.
  •         Missing an RD instalment for a month will not result in a penalty.
  •         The interest rate will be higher than that of a savings account.
  •         The minimum amount to open a recurring deposit account is Rs.100.
  •         Opening an RD account is hassle-free, especially if you already have a savings account.
  •         Simple documentation process. There is no compulsion for existing members to submit documents.
  •         Great savings option to attain your short-term goals.

Eligibility to open a RD account

The following categories of people are eligible:

  •         Resident Indians
  •         Senior citizens
  •         Minors under the supervision of parents/guardians
  •         Non-resident Indians

Documents required for opening a RD account

  •         Passport
  •         PAN card
  •         Driving licence
  •         Voter Id
  •         Job card by NREGA
  •         Aadhar card

Premature withdrawal of Recurring deposit

  • The account holder withdraws the deposited amount before its maturity, the interest rate that they receive will be the same as that applicable for the period during which the deposit remained with the bank. Premature withdrawals of recurring deposits will also be subject to a 1% penalty.
  • The interest rate offered by banks varies based on bank policies.
  •  In the event of a premature withdrawal, some banks would deduct interest rates by 1% to 2%.
  • RD accounts must be locked in for at least three months. The bank would only refund the principal amount deposited by the account holder if the withdrawal is made before the end of this period and no interest is earned.
  •  Additionally, the depositor is ineligible for bank incentives on recurring deposits in addition to the interest penalty.

Partial withdrawal of Recurring deposit

  •  Banks do not permit partial withdrawals of RDs. The majority of banks do not allow partial withdrawals, but some offer an alternative solution in the form of a loan or overdraft, which is secured by the RD account balance.
  • There are some penalties for premature closure. No bank allows partial withdrawals; however, if you’ve had a Recurring Deposit with a post office for at least a year, you can. You can repay the withdrawn amount in one lump sum if you consider it a loan.
  • While you can withdraw prematurely, the interest you receive will be lower than the base rate for the deposit tenure or the interest rate for the duration the deposit has been with the bank. A bank can charge penalty interest on the deposit (1-2%).
  • Recurring deposit accounts have a one-month lock-in period. If the account is closed before the lock-in period has expired, interest will not be earned. Only the principal will be refunded.

Types of recurring deposits

Regular RD accounts:

Indian residents over the age of 18 can open a regular RD account. Account-holders deposit a fixed sum into the account once a month over a pre-specified period, earning a fixed interest rate. Based on the account’s tenure, interest will be calculated using compound or straightforward methods.

RD accounts for minors:

Accounts may be opened in the name of individuals under 18 years old, but only under the supervision of their parents or guardians. When opening the account, a fixed monthly instalment and tenure will be decided. As compared to regular RD accounts, the returns may be similar or a little higher.

RD accounts for senior citizens:

A dedicated RD account is provided by the banks for senior citizens, i.e. those over 60. Senior citizens sometimes show greater interest in RD compared to regular customers. This interest is compounded quarterly.

NRE/NRO RD accounts:

RD accounts can be opened by Non-Resident Indians (NRIs) for External (NRE) or Ordinary (NRO) purposes. With such accounts, NRIs can earn a good interest and save on income earned both within and outside India.

Recurring deposit calculator

To calculate the maturity amount that will be collected by the depositor at the end of the term period, an RD calculator considers the following parameters:

  •         The principal amount deposited
  •         Opening date of the recurring deposit account
  •         The term period

 

 

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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