How does a Recurring Deposit Work?

30 October, 2024

Summary

• Recurring Deposits help you save regularly and earn compounded interest.

• Choose the amount and tenure as per your investment horizon.

• RDs are relatively low-risk and offer assured returns.
  
  

Recurring Deposits (RD) provides you with a disciplined way to save regularly while earning interest over a fixed period. By committing to a set monthly deposit into an RD account, you can steadily build a substantial savings corpus over time. Here, you can get information on Recurring Deposits, how they operate, and the key considerations to keep in mind before opening one.

Recurring Deposit: An Overview

An RD is a type of term deposit you can open with a bank. It is a savings instrument that allows you to save money at regular intervals for a fixed tenure with fixed interest rates.

Features of a Recurring Deposit (RD)

• Fixed Monthly Deposit: The depositor commits to depositing a fixed amount every month.

• Flexible Tenure: The tenure ranges from 6 months to 10 years, depending on your financial goals.

• Compounded Interest: Interest is compounded quarterly, providing higher returns than a Regular Savings Account.

• Safe Investment: RDs offer guaranteed returns, making them a low-risk investment option.
  
  

How Does a Recurring Deposit Account Work?

Understanding what is RD in bank operations is straightforward. When you open an RD account, you agree to deposit a predetermined sum each month. This deposit earns interest at a rate fixed by the bank, and the interest is compounded quarterly. Unlike a fixed deposit, where a lump sum is invested at once, an RD allows you to invest smaller amounts regularly.

For instance, if you open an RD with a monthly deposit of ₹2,000 for a tenure of 5 years, each deposit will earn interest. Over time, the interest is added to your principal, resulting in a larger maturity amount at the end of the term. This systematic approach ensures that you build a sizeable corpus over time without straining your finances.

Eligibility Criteria for Recurring Deposit

To open an RD account, you must meet certain eligibility criteria. These include:

1. Age: Individuals of all ages can open an RD account. Minors can open an account with the help of a guardian.
   

2. Identification: You must provide valid identification and address proof, such as Aadhaar card, or passport.

3. Bank Account: You typically need a Savings Account in the bank where you intend to open the RD. This account will be linked to your RD for automatic monthly debits.
   
   

Important Factors to Check Before Applying for RD

Before you open an RD account, consider the following factors:

• Interest Rates: Compare the interest rates offered by different banks. Higher rates will yield better returns.
• Tenure Flexibility: Choose a tenure that aligns with your financial goals. Shorter tenures offer quicker returns, while longer tenures benefit more from compounding.
  
• TDS and Tax Implications: Understand the tax implications, including TDS on interest earnings. TDS will be deducted if the interest exceeds ₹40,000 in a year (₹50,000 for senior citizens).
  
• Premature Withdrawal: Be aware of the penalties for early withdrawal. Most banks allow premature closure of RDs but charge a penalty or offer reduced interest.

Open an RD with HDFC Bank

Understanding Recurring Deposits and how they work can significantly benefit your financial planning. A Recurring Deposit is a disciplined way to save regularly and earn guaranteed returns. Whether saving for a specific goal or building an emergency fund, an RD account offers a secure and flexible investment option. Ensure you consider all factors, such as interest rates, tenure, etc., before opening an account to maximise your savings.

Open RD now

*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.