What is a Recurring Deposit and How to Calculate its Returns?

In the era of stocks and cryptos, depositing in banks might be termed as ‘old school’. But old is gold for most of us, isn't it?  And for the majority, it is the major medium for savings, especially in India. If you don’t believe us, let the numbers speak.

Around 60% of gross savings in the Indian economy is contributed by the household sector. When taken a closer look, you will be shocked to find that more than half of the household savings are in the form of bank deposits. Of the many options, RD constitutes a major pie.

But what is an RD? And more importantly, is it really that good a source of investment? If yes, then how do you figure your unique investment plan considering the various features, benefits and drawbacks? Don’t worry. We will offer you the necessary information. Hop in.

What is a Recurring Deposit (RD)?

RD is similar to Fixed Deposits. However, unlike in the case of the latter, you will have to make a monthly deposit into your respective recurring deposit account. It is seen as a way to make an individual disciplined in their investing approach. Just like any other investment, you will be receiving the entire sum along with the interest at maturity. The maturity period may vary anything between 6 months to 10 years. And the interest rates vary between 5.00% to 7.85% from bank to bank.

The formula to calculate the RD maturity amount is as follows-

Amount = P*(1+R/N)^(Nt),

where: P is the instalment each month, N is no of quarters or how frequent you do, R is the interest rate and t is the tenure.

Key features of RD or Recurring Deposits

• Withdrawal terms vary from bank to bank. In most cases, the investor is not allowed to withdraw portions of the amount deposited before the maturity period. In other words, he or she cannot make premature withdrawals.

• However, you will be allowed to close the account and get the entire amount along with the interest accumulated until then. Also, premature withdrawal comes with an extra penalty.

• RD investments allow you to take loans keeping the same as the collateral. You can get up to 80 to 90% of the amount deposited as a loan.

• An individual can make a deposit in small amounts as per their wish. The minimum investment can be as small as Rs 10. But many banks have restricted the minimum deposit to Rs 1000.

• You can deposit multiple times depending on your comfort.

• If in case you are a senior citizen, then additional interest is allocated.

• TDS is deducted at 10% if interest income received from the deposit is more than 40,000 for a financial year, and in the case of senior citizens, the limit is at 50,000.

In short, an RD is extremely easy, comfortable and offers you a perfect way to save your hard-earned money.

Eligibility Criteria

In order to open a recurring deposit, you must follow the below criteria:

•  An individual, an entity, proprietorship or corporate company can opt to open an RD account with the bank of their choice.

• Any minor who is above the age of 10 can also open an account, provided they offer relevant proof of name and age.

•  If you are below the age of 10 or looking to open an account for your kids who are less than 10 years of age, then you will have to establish an adult as a guardian for the same.

You can obtain the application form from the bank, fill in the details and submit it with the relevant documents and passport size photo. And that's it! You can create your RD account without much hassle. 

Fixed Deposit vs Recurring Deposit

One serious confusion, which might have risen, is regarding the difference between FD and RD. Why not address it before we jump into the next section?

Other Key Features of RD

• The banks offer a scheme under the name Flexi recurring deposit. Here, you can choose a core amount and make investments as per your convenience in their related multiples. However, the interest is fixed at the core amount.

• NRI and NRE individuals find this mode deposit extremely useful.

• The additional interest offered to senior citizens vary from 0.25% to 0.75%

• The RD deposits will have a lock-in period of 1 month. Only after that you will be paid interest. Further, a premature withdrawal will invite a penalty fee of around 1%.

• The tax obligations of RDs are as follows:

N.B: TDS is deductible only if the interest exceeds Rs 10,000.

How to Calculate Returns from RD?

The important question would be how much fortune can a person amass with a Recurring Deposit?

You’d be shocked to know that a simple Rs 5000 monthly R.D. (at a humble 5% interest rate) can build around Rs 8.29 Lakhs’ worth of wealth in 10 years’ time! Don’t believe it? Take a look at this:

So, you would have effectively made interest of around Rs 2 Lakhs. That’s the power of discipline in financial management!

Anyway, how to arrive at such a figure when RDs are so complicated, you ask? Well, you can use the best RD Calculator on the web provided by Finology.

For instance, we used the query stated below to arrive at the results you just saw -

(Source: Finology Recurring Deposit Calculator)

In Conclusion

A perfect portfolio has a well-diversified mixture of investments. And holding a proper RD or FD deposit as a part of your portfolio becomes crucial. Particularly if you are retiring or planning to retire, these investments will help you in dealing with sudden crises.

So ensure that you have at least a little portfolio of your entire investment corpus towards these sorts of deposits as they ensure stability, safety and cancels off the volatility that is prevalent in other asset classes.

Invest wisely!