If you want to build up your savings gradually, a Recurring Deposit Account (RD) can be a vital financial instrument. This detailed guide discusses RD, its features, benefits, and factors to consider before investing money.
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What is a Recurring Deposit Account (RD)?
A Recurring Deposit Account (RD) is a financial product offered by banks and financial institutions that allows you to save money regularly over a specific period. It operates on the principle of disciplined savings, where you deposit a fixed amount each month. You receive the accumulated sum and interest at the end of the tenure.
Features of a Recurring Deposit Account (RD)
- Regular Savings: RD encourages disciplined savings by requiring you to contribute a fixed monthly amount.
- Fixed Tenure: RD has a predefined tenure, typically six months to 10 years. You select the tenure that suits your financial goals.
- Interest Rates: The interest rates offered on RDs are determined by the bank and may vary based on market conditions. They are compounded quarterly.
- Flexible Contribution: RD allows you to choose the monthly deposit amount according to your budget.
- No Premature Withdrawal: Unlike some other investments, RDs generally don’t permit early withdrawal. It ensures that you save consistently.
Benefits of a Recurring Deposit Account (RD)
- Disciplined Savings: RDs instil a habit of regular saving, promoting financial discipline.
- Steady Returns: With a fixed interest rate, you can predict your returns and plan your finances accordingly.
- Low Risk: RDs are considered low-risk investments as they are not subject to market fluctuations.
- Flexible Tenure: You can choose the tenure based on your financial goals, ranging from short-term to long-term.
- Easy Accessibility: Most banks offer online RD facilities, making it convenient to manage your account.
Considerations Before Investing in a Recurring Deposit Account (RD)
- Interest Rates: Compare various banks’ interest rates to maximise your returns.
- Tenure: Choose a tenure that aligns with your financial goals, whether for a short-term goal or long-term savings.
- Premature Closure: Understand the rules regarding early closure of the RD account, which may result in penalties or lower interest.
- Penalties: Be aware of any penalties for missing monthly payments or making late contributions.
- Taxation: The interest earned on RDs is taxable per your income slab.
Special Coverage: 5-Year Post Office Recurring Deposit Account (RD)
(a) Who Can Open:
- A single adult is eligible to open the account.
- Joint accounts are allowed with up to 3 adults.
- A guardian can open an account on behalf of a minor or an individual with an unsound mind.
- Minors above ten (10) years can open accounts in their name.
- Note: You can open any number of accounts.
(b) Deposits:
- The account can be opened with cash or cheque. For cheques, the deposit date shall be the date of clearance of the cheque.
- The minimum monthly deposit is Rs. 100, and subsequent deposits are multiples of Rs. 10.
- Deposits can be made up to the 15th day of the month for accounts opened up to the 15th day of a calendar month.
- For accounts opened between the 16th day and the last working day of the month, deposits can be made up to the previous working day of the month.
(c) Default:
- If a subsequent deposit is missed, a default charge of 1 rupee per 100 rupee denomination (proportionate for other denominations) applies.
- After four (4) regular defaults, the account becomes discontinued. It can be revived within two (2) months from the 4th default; otherwise, no further deposits are allowed.
- If there are under four defaults, the account holder can extend the maturity period by the number of defaults and deposit the missed instalments during the extended period.
(d) Advance Deposit:
- An RD account that isn’t discontinued can make advance deposits for up to 5 years.
- Rebates are available for advance deposits of at least six (6) instalments. For the Rs. 100 denomination, it’s Rs. 10 for six (6) months and Rs. 40 for 12 months.
- Advance deposits can be made when opening the account or later.
(e) Loan:
- After 12 deposits and a year of continued account status, depositors can avail of a loan of up to 50% of the balance credit.
- Loan interest is 2% plus the RD interest rate, calculated from the withdrawal to the repayment date.
- The unpaid loan balance at maturity will be deducted from the maturity value of the RD account.
(f) Premature Closure:
- RD accounts can be closed prematurely after three (3) years by applying at the post office.
- If closed prematurely just one day before maturity, the PO Savings Account interest rate applies.
- Premature closure isn’t allowed until the period for which advance deposits were made.
(g) Maturity:
- Maturity occurs after five (5) years (60 monthly deposits) from the opening date.
- You can extend the account for another five (5) years by applying at the post office. The interest rate remains the same.
- Extended accounts can be closed during the extension period. The RD interest rate applies for completed years, and the PO Savings Account interest rate applies for less than a year.
- The RD account can be retained for up to 5 years from maturity without further deposits.
(h) Repayment on Account Holder’s Death:
- The nominee/claimant can claim the eligible balance after the account holder’s death.
- After the claim is approved, the nominee/legal heirs can continue the RD account till maturity by applying at the post office.
Final Words
A Recurring Deposit Account (RD) offers a disciplined and convenient way to save money and earn interest over time. Whether you’re looking to build an emergency fund, save for a specific goal, or grow your wealth gradually, RD can be a reliable option.
When you know the features, advantages, and things to consider, you can make intelligent choices that match your financial goals. If you’re seeking a simple and effective savings strategy, an RD could be the perfect addition to your financial portfolio.