Recurring Deposit (RD) – Features & Benefits

What is a Recurring Deposit (RD)?

Recurring Deposit, often called RD, is a great investment option offered by banks, NBFCs, and post offices in India. A depositor can save a small sum of money regularly over the long term and build a savings corpus. It is an especially good option if you don’t have a lump sum in hand.

It is suitable for homemakers, college students, and salaried individuals. Just like Fixed Deposit (FD), RD is a popular savings option across Indian households. Unlike a bank savings account, the interest rates offered by a RD is much higher in comparison.

We have compared the full benefits of FD and RD in a separate post, you can decide which one is a good choice for you by visiting this link here.

Features of Recurring Deposit (RD)

Here are the many features of Recurring Deposit or RD:

• Periodic Deposits: You deposit money in your RD account in regular intervals to build your total amount. This makes it a great savings tool for individuals that don’t have a lump sum amount to save and invest.

• Investment Tenure: The maturity tenure of a Recurring Deposit account is between 6 months and 10 years. You are free to choose it as per your convenience.

• Minimum Amount: Since a Recurring Deposit account aims to create the habit of savings in everyone, right from children to adults, the minimum amount of money that you can deposit in it is as low as ₹. 10.

• Higher Interest Rate: RD accounts are known to provide higher interest rates in comparison to bank savings accounts. They offer interest rates between 6% to 8% which is twice of 3% to 4% that bank savings accounts offer.

• Frequency of Interest: Interest is calculated on your investments on a quarterly basis ie., once every 3 months.

• Partial Withdrawal: Partial withdrawal of the RD amount is not allowed by many banks and is allowed only one time by post offices. However, some banks accept the RD money as collateral and are willing to give the individual a loan against it. If you have a Recurring Deposit account with a post office for at least a year, you are allowed to make a single partial withdrawal of upto 50% of the investment amount.

• Premature Account Closure: While premature account closure isn’t recommended, if circumstances arise that you need to prematurely close your account, you will attract a penalty from the bank or the post office.

Benefits of Recurring Deposit (RD)

RD is a fantastic low-risk investment tool as it generates fixed returns over the maturity period. Here are the many benefits of RD:

Start Saving Small

Investing in a Fixed Deposit requires the investor to invest a big sum in one go, instead of small sums of money periodically. For that reason, RD is a far simpler investment option with the minimum investment limit set at Rs. 10 depending on the financial institution. The main advantage of saving small is that you can start saving at a young age and develop a habit of saving over a period of time.

Guaranteed Returns

Unlike mutual fund based investments like SIPs which are subject to market risks, RD offers a predetermined fixed return, no matter what the state of the market is. You can get the investment amount along with the interest earned over the tenure of the RD together at the time of maturity.

Payment Flexibility

Some banks allow the investors to open what we call a Flexi RD. This special RD allows the investor to set a core amount that defines the bare minimum he or she will deposit every month. In addition to that, the investor can then deposit every month whatever extra he or she is willing to save. However, the extra amount can only be multiple of the core amount.

For eg., if you set the core amount at Rs. 1,000, the variable amount can be only its multiples, that is, Rs. 2,000. Rs. 3,000 and so on. There is flexibility in the amount of periodic deposit which gives the user the freedom to save as much or as little he/she wants, especially in times of crisis.

Long Term Savings

Although you can save in a RD from 6 months to 10 years, it is no surprise that it will give you the best results when you choose to do it over a longer period of time. This we can attribute to Einstein’s 8th wonder of the world, called the “power of compounding”. This in addition to providing consistent returns, is what makes RD a popular investment option across the smallest Indian households.

Loan Against RD 

While partial withdrawal is generally not allowed in the case of banks, some of them do allow you to take a loan in times of dire need by pleading your RD amount as the collateral. Banks can give upto 95% of the total money deposited in the recurring deposit account easily, although it depends on the respective bank policies.

Factors affecting RD Interest Rates

RD interest rates change every quarter. They depend on a number of factors like the age of an investor, the RBI repo rates, and the general economic state of the country. However, an individual is allowed to draw the fixed interest rate as on the day of opening the account, for as long as he/she runs the RD account. The top 6 factors that affect RD Interest Rates:

• Age of Investor: The age of the investor influences the interest rate offered to him/her. Many banks provide 0.5% to 0.75% higher interest rates to senior citizens. 

• Maturity Tenure: RD interest rates vary across all maturity tenures. Hence, whatever tenure you decide to run the RD account for, know that the RD interest rates will vary accordingly.

• RBI Repo Rates: Repo rate is the rate at which the Reserve Bank of India (or the central bank of a country) lends money to commercial banks in times of need. In case of a change in repo rates, interest rates charged by banks on loans also changes. In fact, data shows that a decrease in repo rates causes the interest rates of RDs to decrease and vice versa.
• Economic Conditions: This one is a no-brainer. During times of inflation or recession, the RD rates are very different. When the economy is in a state of inflation, the RD interest rates are on the higher side, while during times of recession, RBI attempts to increase liquidity in the market. Thus, the banks reduce RD rates as a result of low credit demand.
  
• Financial Institution Ratings: The rating of the issuer has a significant impact on the maturity amount. Banks and financial institutions issue RD. These institutions that issue the RD are rated by credit rating agencies. While investing in a bank’s RD is safe, a company’s RD might not be that safe. When investing in a company RD, it is essential to check its ratings. Company recurring deposits with a rating of FAAA, FAA is considered safe. Hence, these have a lower-interest rate than corporate fixed deposits.

Types of Recurring Deposit (RD)

Although any individual can open a RD account, there are three types of RD that function slightly different as compared to regular RD:

Flexi Recurring Deposit (RD) by Banks

Flexi Recurring Deposit schemes allow the depositor to invest a fixed sum every month while not putting a cap on any extra amount the investor might want to deposit. Flexi RD is a type of Recurring Deposit that allows an investor to invest a flexible sum of money based on his/her circumstances. 

The depositor can choose the core investment amount when he/she opens the account. The flexible variable amount can only be deposited in the multiples of the core installment amount. For example, if the depositor chooses Rs. 500 as the core amount, he/she can make a deposit of Rs. 500 and only its multiples for the rest of the maturity tenure. 

As far as the interest earned is concerned, the interest rate on the core amount is predetermined and is calculated as per the day of opening the account. While the core interest rate is fixed, the interest rate charged on the variable “flexible” amount is calculated as per the investment duration.

Flexi RD schemes offer depositors a choice on savings as per their convenience every month, which makes it a fantastic flexible option.

Recurring Deposits for NRI/NRE

NRIs who are looking forward to saving some money with small monthly investments can easily do it with the help of opening a Recurring Deposit account. For NRIs, investment options could be NRE Recurring Deposit or NRO Recurring Deposits:

• NRE RD Accounts:  NRE accounts are Non-Resident External accounts. In the case of NRE RD accounts, your deposit installments have to come from NRE Accounts only. Remember that the interest from an NRE RD is free from tax in India, and is freely repatriable. 

• NRO RD Accounts: NRO accounts are Non-Resident Ordinary accounts. In the case of NRO RD accounts, the investments towards the deposit installments can come either from NRE or NRO accounts. In the case of NRO RD accounts, however, the interest is taxable at a rate of 30%, plus the cess. This is repatriable, subject to certainly featured requisites.

What to choose between NRE RD and NRO RD?

You can choose either an NRE RD account or an NRO Rd account based on your source of funding for the deposit installment:

1. If the funding for your deposit installment is from an overseas source, you should prefer NRE Recurring Deposits. 
2. If the funding for your deposit installment is from rent or any other income source in India, then you can go for an NRO RD account.

Recurring Deposit Senior Citizens 

RD is a great savings option for senior citizens. You can save a fixed amount every month for the tenure you choose and earn a predetermined rate of interest over a quarterly basis. 

The advantage of having a senior citizen recurring deposit account is that banks offer an extra 0.25% to 0.75% rate of interest to senior citizens as compared to other individuals. 

What is Recurring Deposit Interest Rate?

The interest rate offered on your regularly deposited amount by the bank or the post office is called the Recurring Deposit interest rate. While the rate varies every quarter, for an individual once it is determined it stays the same throughout their maturity tenure irrespective of the market fluctuations.

This is what makes RD a very attractive investment option to the investor. It offers a sense of security due to the fixed returns policy.

RD Interest Rates Offered By Different Banks

RD Interest Rates offered By different banks are not the same. Depending on the bank, the interest rate can be charged higher or lower. As explained above, the interest rates change every quarter however, once the RD interest rates are decided, they do not change during the tenure of the deposit. Here’s a list of popular banks and the RD Interest Rates Offered that they are offering:

Bank	RD Interest Rates
Allahabad Bank	6.25% to 6.75%
Andhra Bank	6.25% to 6.85%
Axis Bank	6.25% to 6.75%
Bandhan Bank	6.5% to 7.5%
Bank of Baroda	6.25% to 6.9%
Bank of India	6.50% to 6.70%
Bank of Maharashtra	6% to 6.25%
Canara Bank	6% to 6.5%
Central Bank of India	4.75% to 6.6%
CitiBank	5.25%
City Union Bank	6.7% to 7.1%
Dena Bank	6.5% to 7%
Deutsche Bank	6% to 7.5%
DHFL Bank	7.75%
Federal Bank	6.5% to 7%
HDFC Bank	5.75% to 6.75%
ICICI Bank	6.0% to 6.75%
IDBI Bank	6% to 6.65%

Indian Bank	4.5% to 4.75%
Indian Overseas Bank	5.75% to 7.25%
IndusInd Bank	6.5% to 6.85%
Jammu and Kashmir Bank	6.5% to 6.75%
Karnataka Bank	6.5% to 6.9%
Karur Vysya Bank	6.75 to 7%
Kotak Mahindra Bank	6% to 6.6%
Lakshmi Vilas Bank	7%
Oriental Bank of Commerce	6.5% to 6.85%
Punjab and Sind Bank	6.40% to 6.80%
Punjab National Bank	6.25% to 6.75%
State Bank of India	6.25% to 6.75%
South Indian Bank	6% to 6.75%
Syndicate Bank	6.5 to 6.6%
UCO Bank	6.25% to 6.5%
Union Bank of India	6.8% to 7%
Vijaya Bank	6.25% to 6.5%
Yes Bank	7% to 7.10%

RD Interest Rates Offered By Post Office

The RD interest rate offered by the post office for this quarter (October to December 2020) is 5.80%. This interest rate is not fixed and changes every quarter (3 months).

Frequently Asked Questions about RD accounts