What is a Recurring Deposit?
Recurring deposits are an investment instrument that helps the investor in saving their money on a regular monthly basis. RDs are considered to bring disciple to an investor's life as it inculcates a regular investment habit in them. Almost all the banks in our country provide RD accounts just like FD accounts. Both Recurring Deposits and Fixed Deposits mostly work on similar terminology. The main difference is that lump sum deposits are made under Fixed Deposits whereas Fixed monthly deposits are made under Recurring Deposits.
Recurring Deposits offer an attractive interest rate that varies from one bank to another just like Fixed Deposits. The calculation of RDs is complex and hence RD Calculators are used by banks to calculate the amount to be received at the time of maturity.
What is RD Calculator?
Recurring means continuous. Recurring deposits are the continuous deposits made to the bank for a defined period of time to save your money. The interest rate remains constant throughout the tenure of the RD, making RD Calculation a little less complicated.
RD Calculator helps in the computation of returns in a hassle-free manner within a few seconds. It is quite easy when compared to manual RD Calculation as all you have to do is put in some details related to your RD on the calculator, and it reflects the amount it will accrue after maturity.
How does a RD Calculator work?
Interest on RD is compounded quarterly, in most banks. The formula for this is :
M = R[(1+i)^n-1]/(1-(1+i)^(-1/3) )
In this,
M = Maturity Value
R = Monthly Installment
n = Number of quarters
I = Rate of interest/400
So, if you invest in RD and put in Rs. 5,000 per month for a year, at the interest rate of 8%, your total value will be calculated as:
R = 5000
n = 4 (one year has four quarters)
I = 8.00/400
M = Rs. 62, 647 in one year
Here is an example for easy understanding
Let us say Sudhanshu starts investing ₹10000 in a recurring account for a tenure of 1 year (4 quarters). the interest rate that his rd account offers is 8%. now let us use the above formula to calculate the final maturity amount.
Maturity amount = 10000*(1+ (0.08/4)) ((4*12)/12) = ₹10824.32
= 10000*(1+ (0.08/4)) ((4*11)/12) = ₹10753.10
Similarly we need to calculate for all remaining months till 1 month
calculation for 1st month look like this = 10000*(1+ (0.08/4)) ((4*1)/12) = ₹10626.58
If you sum like above for all the months the total maturity amount that you will arrive at is ₹1, 25,293/-
Benefits of RD
- RD can be used as collateral for taking loans. You can take up to 80-90% loans on your RD amount
- Premature withdrawals are allowed under RD. However, this may come with a small penalty
- RD schemes allow for a higher rate of interest (usually 0.5% more) for senior citizens
- Minors can also open RD accounts under the supervision and guardianship of their parents
- The tenure is also flexible and you can choose from 7 days to 10 years depending on your convenience
- RD schemes allow you to save money on a regular basis and the minimum deposit amount can be as low as RS. 10
Tax Benefits on RD
- Similar to other personal tax-saving and investment instruments, Recurring Deposit schemes also attract taxes. A TDS of 10% is deducted on the returns accrued from an RD if the total interest exceeds Rs. 10,000 in a single financial year.
- Compare this to the SIP scheme and you can see that SIPs are more beneficial in the long term. Since long-term gains from equity are tax-free, any SIP which invests in ELSS (Equity Linked Mutual Funds) is also tax-free after one year.
What are the minimum and maximum tenures to open a bank RD?
Recurring deposits are one of the safest and best investment options, which inculcates a habit of regular investments in the investors. In India, many banks offer recurring deposits whose interest rates vary from 4 to 7.5%. The minimum amount that one can invest in an RD account is ₹10. The minimum and maximum tenure to open a bank rd are 6 months and 10 years, respectively. The invested amount is compounded on a quarterly basis. In recurring deposits, premature and midterm withdrawals are not allowed. In case of premature withdrawal, some amount will be charged as a penalty.
What are the factors affecting RD interest rates?
RBI interest rate policy is the primary factor that affects the interest rate (including recurring deposit interest rates). RBI revises the interest rates every 3 months. RBI considers many factors like inflation, country economy stability, etc., before revising the rates. In case of an economic downturn, the RBI reduces the interest rate. this is bad for recurring deposit investors but good for businesses. In the case of good economic conditions, it will increase the rate. This scenario is good for RD depositors because they get more returns because of high rates. Banks have the freedom to set their interest rate for their customers. Banks, however, cannot offer the rate they wish due to competition and interest rate policy.
