The Buyt Desk
Recurring Deposit (RD)is an investment of a regular sum of money each month for a specific time period. It allows you to invest as you earn on a monthly basis. The amount accumulates for the time period of the deposit along with interest and is paid out at the time of maturity. This is a systematic and regular investment plan. It allows an individual to save regularly and build up a corpus without taking risks. You get your salary, you deduct all your expenses and then whatever money is left you open a recurring account and deposit your money. Whenever we invest, we expect our money to be safe and get guaranteed returns. Bank fixed deposits live up to these two expectations. But the interest rate of bank FDs are falling and the compulsion of depositing a lump sum amount may not be feasible for every investor. What to do if you cannot deposit lump sum money? Recurring Deposit allows you to invest in monthly instalments.
Where Can I Open an RD account?
RD accounts can be opened in banks and post offices. RD gives you the facility to deposit every month. The monthly maximum amount can be anything. A minimum investment of Rs 100 can also be done. Bank RDs are of 6 months, 1 year, 5 years to 10 years tenure. Whereas in the post office there is only one tenure of 5 years. Post office RD is currently paying the highest interest at 5.8% as compared to banks. TDS has to be paid on the interest of recurring deposits.
You can lock interest on RD
RDs are a good way to earn compounding interest. It also allows you to lock your interest rate from the start of your investment till maturity. Suppose you started investing in April 2021 at an interest of 5.8%. The interest rate gets slashed in June 2021. The interest is reduced to 5%. But you started investing when the interest was 5.8%, so your deposit will continue to earn interest of 5.8% till April 2024.
Tax on Recurring Deposits
The interest of RD is taxed according to an individual’s income tax slab. Banks will deduct TDS if the interest is more than Rs 40,000. Under the Income Tax Act, you get a deduction of Rs 1.5 lakh under section 80C for post office RD. Tax exemption is not available on bank RD.
Who Should Open An RD Account?
If you want to invest through instalment every month then RD is the way forward. Know that in how much time you would need this money and choose the tenure of RD accordingly. It is an ideal investment for those who are fine with the lesser returns but want to keep their principal investment money safe.
